The weak sterling is disastrous for Irish competitiveness, writes Laura Slattery

PATRIOTISM IS the new catchword in the evermore desperate attempts to discourage consumers from shopping across the Border. Unfortunately for the Government and indigenous retail sector, there is a new P-word in town: parity.

With the euro hitting a series of fresh highs against sterling in recent days, crisp pound notes with the Queen's head on them have increased in value for euro-earning shoppers.

But while a weak sterling might seem like a lifeline to consumers, the extreme currency movements, which have quickly mutated into a full-blown exchange-rate crisis, are disastrous for competitiveness. In some cases it is hitting the basic trading ability of Irish exporters, many of whom were already suffering from a slide in the dollar over the past two years.

After breaking through the 90p level for the first time in its history on Monday, the euro continued its inexorable rise against the pound this week - trading as high as 95p yesterday morning. Last January, €1 was worth 65p. And with the Bank of England forecast to make another deep cut in interest rates, euro/sterling parity - €1 for £1 - is an increasingly likely prospect.

With central banks collectively snookered by severe recession, John Whelan, chief executive of the Irish Exporters' Association (IEA), is resigned to the fact that sterling is not going to recover anytime soon. The measures that the Bank of England could take to stabilise currency rates, such as hiking interest rates or buying up sterling, are impossible at this time. The IEA has a three-point plan it hopes the Government will adopt to alleviate exporters' pain.

The first is quite simple, in theory: help exporters reduce their dependency on our nearest neighbour. State agencies such as Enterprise Ireland, Bord Bia and Bord Iascaigh Mhara should "do everything they can to find fresh buyers in the euro zone", according to Whelan.

Secondly, the IEA is proposing "a sterling equalisation fund in which retailers could leave their receivables in sterling and the bank holds on to them". The IEA's third policy recommendation is for the State to re-enter the export credit insurance market, from which it withdrew in 1998.

When the credit insurance industry withdraws cover, as it has in many cases on exports to Russia, Central America, South America and eastern Europe, the State should step in, he says. These are the fast-growing economies that Irish exporters could use to reduce their sterling exposure.

This currency crisis looks set to be more threatening to exporters than the early 1990s crisis, Whelan believes, with exports to the UK already down €700 million on October 2007. Although many exporters have diversified into previously untapped parts of the euro zone, the UK is still the Republic's main trading partner, with the €16.4 billion worth of exported goods and services to the UK in 2007 accounting for 18 per cent of total Irish exports.

In the food industry, dependency on the sterling market is ominously high: some 42 per cent of food exports are shipped to the UK.

"It's causing huge difficulties," says Paul Kelly, director of Food and Drink Industry Ireland, an Ibec group. The deterioration in sterling has been "absolutely unprecedented", he says.

"You've seen a massive deterioration in the competitiveness of Irish food and drink exporters."

And this is the industry that is supposed to be recession-proof.

"If you forget about the currency, we're uncompetitive as it is," Kelly says. He says the Government must urgently tackle waste, energy and other costs that can be controlled. Just abandoning the UK market is not an option.

"It's very hard to ignore your nextdoor neighbour, especially when it's the fifth-biggest economy in the world. Food and drink companies are very limited by their options and there will be job losses in the new year," he predicts.

Suggestions within European Commission circles that the pound's rapid decline will hasten the UK's entry into the euro zone have been denied by British business secretary Peter Mandelson, but there is no doubt it would be good news for Irish exporters - on the proviso that the British currency was pegged to the euro at a rate that did not cause competitive damage, Kelly notes.

In the meantime, Irish shoppers will continue to take the entirely reasonable route to poundland, where special offers and "one-day spectaculars" are being used to prod consumers into the realisation that it is, after all, Christmas.

With alarmingly high stockpiles of festive goods, retailers in the Republic are engaged in similar practices. But the difference is that the "20 per cent off" and "half-price" signs in UK-based stores come on top of price tags that are already discounted for Irish shoppers - with a UK VAT rate that is 6.5 per cent lower exacerbating the sterling effect.

The knock-on effects on jobs in the Irish retail sector, which employs 300,000, are likely to emerge in January when the extent of consumer frugality is laid bare. The omens in this week's Central Statistics Office retail sales index were not good: core retail sales (excluding vehicles) fell 6.2 per cent in the year to October - the worst performance since 1975.