Painful Internal Devaluation Unavoidable

The erosion of economic competitiveness in several (mostly Southern) eurozone economies since the inception of the euro means that a prolonged deflationary cycle will be necessary to bring wage and asset price levels in line with macroeconomic realities. In the absence of a formal fiscal transfer union with the core states, we believe that the internal devaluation of the Baltic economies provides a good indication of what may await the economies of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) over the next few years.

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