Internal devaluation: the hidden price of monetary union in Spain

The euro does not abolish devaluation: it turns it into unemployment and lower wages

Fifteen years after the Great Recession, the eurozone is once again looking at the mechanism it refused to see: a monetary union does not eliminate the exchange rate, it turns it into something else. What the currency market once resolved in one blow is now borne by jobs, wages and the risk premium. Internal devaluation is not a metaphor: it is the real adjustment of an economy without its own currency.

Spain, the laboratory of adjustment without a currency

The Spanish case proves it with a harshness that textbooks gloss over. Between 2010 and 2012, those who kept their jobs saw their nominal pay fall by around 4%; once inflation is factored in, the real loss came close to 12%. The adjustment hit quantities before prices: unemployment first, wages after. Confidence was restored by raising the deposit guarantee from 20,000 to 100,000 euros while, in March 2012 alone, more than 60 billion euros left Spanish banks.

Bagehot, the ECB and the toll nobody paid

The debate over the safety net remains trapped in Bagehot. The lender of last resort demands a penalty rate and quality collateral, but the ECB's OMT (Outright Monetary Transactions programme) has never been activated: its toll is the conditionality of the ESM, a price no government wants to pay at home. Those who argue the euro was a mistake from birth point out that it is not an optimal currency area: without labour mobility or fiscal transfers, a single policy does not fit asymmetric cycles.

The analysis stalls on the same question: if the union merely shifts the adjustment onto politics, how much unemployment can the project withstand before the political cost breaks it?