The Failure of Internal Devaluation and the Case of an Investment – led Strategy to Foster Competitiveness in Greece

The internal devaluation process constitutes one of the main two pillars of the Economic Adjustment Programmes implemented in Greece, aiming at the enhancement of cost competitiveness of the economy through the reduction of labour costs. The aim of this policy brief is to examine the appropriateness of such a policy with regards to the actual needs of domestic production. In particular, it is shown that the problem of the Greek economy is related to structural and not cost competitiveness. Therefore, the internal devaluation policy was destined to fail in its primary goal to promote export-led growth. This argument is further supported by the provision of estimates regarding the scenario of what would have happened whether an investment-led strategy had been adopted instead.