Economics researchers find a miracle cure for Southern Europe's Sovereign Debt Crisis

Without the option of a currency devaluation, there are simple fiscal alternatives to exchange-rate devaluation that can address southern Europe’s short-term competitiveness problems - this is the argument put forward by Gita Gopinath, Emmanuel Farhi and Oleg Itskhoki.

These economists, although from traditionally 'saltwater schools' stay clear of the routine arguments for stimulus or for austerity, instead they defend that:

"There is a remarkably simple alternative that does not require southern Europe’s troubled economies to abandon the euro and devalue their exchange rates. It involves increasing the value-added tax while cutting payroll taxes. Our recent research demonstrates that such a “fiscal devaluation” has very similar effects on the economy in terms of its impact on GDP, consumption, employment, and inflation.

A currency devaluation works by making imports more costly and exports cheaper. A VAT/payroll-tax swap would do exactly the same thing. An increase in VAT raises the price of imported goods, as foreign firms face a higher tax. To ensure that domestic firms do not have an incentive to raise prices, an increase in VAT needs to be accompanied by a cut in payroll taxes.

Moreover, since exports are exempt from VAT, the price of domestic exports will fall. The desired competitiveness effects of exchange-rate devaluation can thus be had while staying in the euro."

Should Greece, Portugal, Italy and Spain hire the Harvard / Princeton academics and dump the "Troika"?

It sounds that this way you can actually cook Huevos rotos without breaking the eggs. At first glance this theory seems to hold water only partly, as it would require massive cuts in payroll taxes to make export costs before VAT fall. A sector analysis will easily identify the possible areas of benefit. Nevertheless it looks obvious that service companies are the ones with the highest potential cost reductions... and errrr.... these in general sell to the domestic market, so any benefits here would be indirect, being eventually harvested downstream in the production chain.

German Euro vs South European Euros - some Euros are more equal than others... can a fiscal devaluation bring competitiveness to Southern Europe while keeping the Euro-zone intact?