Several European countries face challenges reminiscent of those faced by the emerging economies of Latin America. The economic booms in some peripheral Euro-zone countries financed by large capital inflows; the credit and asset price booms and then the busts including Sudden Stops in capital...

To overcome the Euro Area crisis, periphery countries were pushed to cut labour costs. However, internal devaluation (ID) is known to improve exports only partially. This opens the question as to why ID was so central in managing the crisis. We argue that ID, beyond its purely economic impact,...