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By Philippe Legrain 1 COMMENT

Paul Krugman argues that a benefit for Britain of keeping the pound is that it has been able to devalue – unlike, for instance, Spain, which is part of the euro – and illustrates the point with a chart that shows the 20% devaluation of the UK’s real exchange rate since the crisis hit.











Fine. But a fall in the real exchange rate is just a means to an end: the real aim is to boost net exports and consequently swing the current-account deficit towards balance.

And here’s the thing: despite Britain’s devaluation, neither its trade deficit nor its current-account deficit have shrunk. Astonishingly, in a slump Britain’s current-account deficit has actually widened, from 2.3% of GDP in 2007 to 3.5% of GDP last year.

In Spain, in contrast, there has been a huge improvement in both the trade and the current-account balance. A current-account deficit of 10% of GDP in 2007 had shrunk to 1.1% of GDP by last year.

To which Krugman would doubtless retort: that’s because domestic demand has collapsed and with it imports.

Yes, imports have fallen – and I agree with Krugman that the excessive austerity in Spain has been a huge mistake (as, I would add, has the failure to fix the banking system).

But the volume of Spanish exports – even without devaluation – has also soared, as the chart shows. In Britain, in contrast, export volumes are scarcely higher than before the devaluation.

Export volumes











Source: Eurostat, Exports and imports by the EU countries and by third countries – volumes [nama_exi_k]

So is a British-style devaluation really what Spain needs?


Posted 07 Jul 2013 in Blog, Britain, euro, Spain
  1. Very interesting article. I would be interested in understanding why you think that it may be that the spanish or portuguese approach has beenmore effective than the british approach? and why has Greece not had a s much success as Spain?

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