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Direct effects of debt crisis can't explain away British deficit

Some may say that Stefan Karlsson's assertion that an increasing British trade deficit is a sign of an overvalued pound, arguing instead that it reflects the euro area debt crisis. But Karlsson still maintains that there are other issues at play.

John Kolesidis/Reuters
A man walks outside an one euro shop in central Athens June 18, 2012. Greece's conservative leader pushed on Monday for a new coalition government after a narrow election victory, pledging to soften the debt-laden country's punishing austerity program despite opposition from Germany.

Those who disagree with my contention that the increasing British trade deficit is a sign of an overvalued pound may argue that the increase simply reflects the euro area debt crisis. 

However, during the latest year, the total monthly trade deficit in goods rose by £2.7 billion, from £7.4 billion to £10.1 billion, while the deficit with the euro area alone only rose by £1.6 billion, from £1.9 billion to £3.5 billion. The deficit also rose by £400 million with other non-euro area EU countries and by £700 million with countries outside the EU.

By contrast, Germany was able to compensate the drop in its trade surplus with other euro area countries by increasing its surplus with both non-euro area EU countries and with countries outside the EU.

So while the general drop in demand the crisis hit countries explain some of the British export weakness, an overvalued pound has weakened it further while also contributing to increased competitiveness of imported goods in the British market.

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