The first graph in this post is really quite alarming. (It would of course have been nice if there had been Irish data!)
For an individual country, ‘internal devaluation’ is the optimal strategy in our situation. (Optimal given our constraints that is — it is an incredibly lousy option relative to nominal devaluation, or being able to run a counter-cyclical fiscal policy.) But if everyone is doing the same thing, then it becomes collectively self-defeating.
This is a European problem, and requires European solutions designed to support demand and prevent continent-wide deflation.
Paul Krugman is alarmed here.