[2] Internal devaluation gained popularity during the economic recession of 2008–2010 when several countries pursued such policies with aim to restore competitiveness and to balance national budgets.
While internal devaluation has been discussed in newspapers and has been put into work as a policy already for some years in the several countries, peer-reviewed research on the topic is sparse and has started to appear only recently.
Much of it is restricted to qualitative observations (e.g. ScienceDirect database list more than 3 times more articles for such emerging discipline as geo-engineering (human control of global climate) than for internal devaluation).
It also mentions the limitations of what can be achieved by the internal devaluation—internal devaluation can result in the "interesting trap of no-downward wage adjustment as the flexible part of earnings vanishes".
de Grauwe estimates Ireland to have completed an internal devaluation amounting to 23.5%, Greece 11.4%, Spain 8.9%, Portugal 3.2% and Italy 0.6%.
While the process was painful in terms of unemployment and wage cuts, exports did pick up, the external deficit was eliminated and Latvia's economy returned to growth.
[11] Another alternative (mentioned in old textbooks) is to cut taxes, hence making labour cost cheaper [12] Given the lack of solid empirical studies on the topic, the success of internal devaluation has been considered as an urban legend or even political propaganda by some.
There is proof that extended unemployment benefits lead (contrary to the imagination of the general public) to higher GDP, because it opens space for more optimal employer-employee contracts where the employer can get more skilled and loyal employees.
Having said that, opponents of the internal devaluation do not propose default as the solution of the economic problems, instead, they simply point that other goals (e.g. boosting the productivity, investments and increase of GDP and not the putting caps on the sovereign debt) should be taken into account when political decisions are made.
E.g. one should greatly improve the movement freedoms for workforce, goods, services and capitals for the monetary unions to attain the situation where the single currency regime functions smoothly for all the regions some of which are in the different positions of the economic cycle than others.