Currency devaluation causes import inflation and cuts real wages

Evidence

For people and firms, it was a pain to have to change currencies to travel or trade, and having to do so reduced both. At the state level the argument was that all the different exchange rates moving together generated currency volatility that was hard to hedge against, and it created incentives for weaker currencies to seek respite by devaluing against their stronger trading partners to improve their own competitiveness, which many European states did, repeatedly. The problem with devaluation as an adjustment policy is not only that it beggars thy neighbor; it also leads to import inflation in the countries that devalue. Italy became the poster child for these problems, having devalued the lira every year between 1980 and 1987, save 1984, thereby suffering much higher-than-average inflation than the rest of Europe while effectively reducing the average Italian’s real wage through the inflationary back door. — Mark Blyth, Austerity, 210

Categorization

• XREF: Connects to the beggar-thy-neighbor logic and adjustment mechanisms that Mattei and other austerity critics analyze; also parallels how devaluation shifts costs within EMU since the euro removed this escape valve. — connects to: A central bank veto on all policy save austerity turned devaluation into economic harm. — Mark Blyth, Austerity: The History of a Dangerous…, 554; Export-led growth structurally demands wage suppression and anti-inflationary monetary dominance — Mark Blyth, Austerity: The History of a Dangerous…, 368; Monetary austerity deliberately aimed to rein in workers’ purchasing power — Clara E. Mattei, The Capital Order: How Economists…, 757 (+3 more)
• DEFINE: Provides the concrete mechanism by which devaluation worked as an adjustment policy and why it was abandoned — key context for why the euro was adopted.

Broader Connections

• Export-led growth structurally demands wage suppression and anti-inflationary monetary dominance #expands (0.80) — Mark Blyth, Austerity, 368
• Monetary austerity deliberately aimed to rein in workers’ purchasing power #responds-to (0.75) — Clara E. Mattei, The Capital Order, 757