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.
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?