The only way they could regain a competitive position to generate more export income and reduce their dependence on foreign capital was by making painful choices to cut wages and bloated public payrolls. Economists call this dreaded belt-tightening process “internal devaluation,” and it achieves much the same end as a currency devaluation, by restoring export competitiveness. Only it is slower and more politically difficult, particularly in labor-friendly Europe, since it involves tough union negotiations. Five years after the crisis, Europe’s peripheral economies were still struggling to
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