Why the eurozone's woes could hurt the UK

Of course lower prices can help hard-pressed families by bringing down the cost of living. But deflation is bad news for economies in the long term.

Falling prices leads to people putting off purchases. If they believe a TV will be cheaper next month, they'll wait for the price to fall. If people stop shopping, retailers are forced to slash prices further, which leads to declining profits, lower wages and companies shedding staff.

What's more, it makes debt payments more expensive. Companies are at risk if they are unable to pay their debts given the lower revenues and profits seen from deflation.

For nations like Greece and Italy, which have racked up huge debts, this is a serious problem.

Fair enough. But why does it matter to the UK?

In a word, trade.

The EU is still Britain’s single biggest overseas market, so an economic standstill in the eurozone will hit UK exports hard.

David Miles, one of the Bank of England’s policymakers, summed it up on Thursday when he said British exports to the EU are “dead in the water”.

Britain’s overseas investments are also concentrated in the EU, so poor performing EU firms will hit the UK’s return on foreign investment hard, too.

Both of these factors mean further pain for the UK’s current account deficit, which already stands near a record high at 4.4pc of GDP.

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