Austerity And Economic Recovery Can Work Outside Of The Eurozone

When an economy is in recession, and it has its own currency, the currency can be devalued.  That will make its exports cheaper and it will make imports more expensive.  This is painful for savers, and for those who hold assets denominated in the devalued currency, but it can help the economy to recover.  Iceland and Latvia are often used as examples of countries which prove that contractionary fiscal policy does not necessarily prevent a recovery from recession.  Currency devaluation is painful but it can lead to export driven growth.  The troubled countries in the eurozone do not have the option of currency devaluation.  They are forced to use contractionary fiscal policy to reduce wages and prices.  The assumption is that the structural reforms that lead to wage and wage and price deflation will make their exports price competitive and lead to export driven growth.  That has not worked for several reasons.  The structural reforms are more politically difficult to implement and the process of wage and price deflation is more painful to wage earners than currency devaluation which primarily affects savers and asset holders.  Fiscal contraction has not had the intended effect in the eurozone and it does not make sense to use Iceland and Latvia as examples of successful fiscal contraction for countries in the eurozone.