Analyzing the Effect of Internal Devaluation Policies on European Export Demand – A Panel Analysis on Industry Level

Abstract: After the outbreak of the financial crisis in Europe in 2008, the strategies to antagonize its con-sequences, involved the implementation of internal devaluation policies such as nominal wage suppressions. The effectiveness of these policies has undergone various studies with rather negative criticism and evaluation. To produce further research and perform an empirical analy-sis in this field, this paper investigates the effect of unit labour costs on export demand of seven European countries on a specific industry basis between 2005 and 2014. Exports of twenty-one manufacturing industries, characterised by the International Standard Industrial Classification of all Economic Activities revision 4 (ISIC, rev. 4), have been analysed in a gravity model. Also the relationship has been investigated, excluding data for a representative crisis period (2008 - 2010) and for a reduced country group to depict the effects of GIIPS countries relative to Euro-pean core countries. The research finds a statistically significant effect between exports and unit labour costs as well as the anticipated negative sign. The effects increase in the reduced time frame and decrease in the restricted country group, indicating that the crisis had major effect on the performance of unit labour cost cuts and that the GIIPS countries show rather small improvements relative to the European centrum.