Antonio Fatás (h/t Mark Thoma) asks what would have happened if Spain, say, had been able to devalue its currency in response to the crisis? By comparing the trajectory of Spanish and British GDP, he questions the conventional wisdom that control over currency is the key to adjustment that is lacking in the Eurozone member states. He admits that the comparison is highly imperfect, and indeed it is. One might ask, for instance, if it wasn't the Cameron government's commitment to draconian austeriy measures from the time it took office in 2010 that accounts for the abrupt end of what looked to be a fairly robust initial recovery compared with Spain's.
Still, it's worth asking exactly how much improvement in the current account deficit of Spain or Italy or Greece or Portugal could be achieved by devaluation. Price, after all, is not the only area in which the PIGS export sectors are deficient. Their economies, unlike Germany's, aren't really built around making what the rest of the world wants (Italy is something of a special case). And therefore austerity, which is designed to bring about "internal devaluation," won't make these economies more competitive. It will, however, reduce imports by contracting their economies. This is a perverse adjustment path.