How Greece can "devalue" and keep the euro

A UBS news brief explains how Greece could use a proxy of devaluation, i.e  “social VAT”, to gain competitiveness and boost exports .The idea is to switch from taxes on labour to taxes on consumption. This has the advantage of reducing the cost of labour, but also of taxing imports, which is a way to shift part of the burden abroad. The idea is thus simple: instead of adjusting the exchange rate, the adjustment is provided by a cut in labour costs, or more precisely the tax component of the labour cost. Greece has increased VAT twice already this year, moving the main rate from 19% to 21% in the fiscal package presented on 3 March, and then again from 21% to 23% in the IMF-sponsored package. But on the social security contribution, there is no compensating cut yet. UBS argues the adjustment in labour costs will come essentially from the abolition of 13th and 14th month salary payments in the public sector!