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Abstract

The recession of the late 2000s and early 2010s greatly impacted the southern economies of the euro area such as Portugal, Greece and Spain. The recommendation that firms in those economies should reduce unit labour costs to gain international competitiveness in response to domestic economic crises was based on the assumption that domestic and foreign supply decisions are not linked at the firm level. This paper examines whether exports can have a significant impact in mitigating domestic slumps through an alternative channel: the venting-out mechanism. The paradigmatic case of Spain shows that firms with a falling domestic demand that had the ability to reduce their usage of flexible inputs relative to fixed achieved a short-term decrease in marginal costs gaining competitiveness abroad. The results in the paper help rationalize the coexistence of export booms during economic crises in economies in which internal devaluations had limited effectiveness in the short-run.