U.K. SHOWS DEVALUATION NO BALM / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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MARCH 9, 2010, 2:43 P.M. ET.

U.K. Trade Shows Devaluation No Balm .

By RICHARD BARLEY

Much of the debate over the troubles faced by Greece, Portugal, Spain and Ireland in rebalancing their economies has focused on their inability to devalue. But the woeful U.K. trade data unveiled Tuesday suggests that maybe devaluation isn't quite the safety valve it is cracked up to be—at least not in this crisis.

The U.K. deficit on trade in goods widened unexpectedly to £8 billion ($12 billion) in January, well above the consensus forecast of £6.9 billion pounds, as imports fell 1.6% on the month and exports plunged 6.9%. True, the data are volatile and prone to revision, but the deficit is proving stubborn: a year ago it stood at £7.5 billion. That has confounded hopes that sterling's 25% slide against the dollar and the euro since the start of the financial crisis would buoy the export sector and redirect domestic demand for imports.

But exchange rate fluctuations may have lost some of their power. Previous sharp depreciations may have had added punch as they were typically associated with sharp cuts in interest rates from unsustainably high levels. It also helps if the economy is producing goods that others want and if export markets are buoyant. Since interest rates were low to start with, and given the U.K.'s reliance on financial services and relative weakness in manufacturing, sterling's slide has yet to deliver any fruit.

There may yet be a turnaround. The Bank of England noted in February that survey data showed businesses' export orders and optimism had recovered recently. But that is unlikely to add much to the sluggish performance of the economy near-term: Barclays Capital expects net trade to be a slight drag on GDP growth in the first quarter.

Sterling's steep depreciation may merely have acted to cushion the economy on the way down without acting as an impetus for a rebound. If so, the U.K.'s hopes of a relatively painless adjustment and economic rebalancing are likely to be dashed. It will just have to tackle its pre-crisis excesses the hard way—just like Greece, Portugal, Spain and Ireland.

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