IN THE past 12 months sterling has slumped in value, dropping by more than one quarter against the euro. That sharp decline has left Irish exporters, particularly small firms reliant on the British market, struggling to compete as their profit margins fall. Sterling's rapid depreciation against other major currencies reflects international investor concern about the deteriorating outlook for the UK economy.
Britain has become over-dependent on financial services and property for economic growth. And, like Ireland, it has been hit hard by the global credit crunch. The Bank of England cut interest rates last month to boost demand and so lessen the impact of economic recession. A weaker pound, in turn, allows British exporters to compete more successfully in foreign markets.
Part of the solution to Britain's economic problems is currency devaluation by stealth, which presents Irish exporters with a huge challenge. By contrast, the value of the dollar against the euro is similar to this time last year, though it has fluctuated in the interim and the US Federal Reserve decision to cut interest rates close to zero on Tuesday means the American currency is set to weaken. Sterling hit its lowest point against the euro yesterday and may be moving towards parity. In recent years a sharp loss of cost competitiveness has left Irish exporters with little room to manoeuvre. The cost of labour and of doing business is now higher here than in the UK. A 26 per cent sterling devaluation in the past year has made matters worse.
Before Ireland joined the euro, periodic devaluation of the Irish pound was one way to restore competitiveness, as happened in the late '80s and early '90s. Within a currency union, that is not an option. From an Irish perspective the best solution would be for Britain to join the single currency, thereby ensuring exchange rate stability with our most important trading partner. However, for political and economic reasons that is unlikely. The euro celebrates its 10th anniversary on January 1st. It has been a remarkable success. It is now the currency of 320 million people in 15 countries and accounts for 27 per cent of the world's official foreign reserves. That said, the European Central Bank (ECB) may be facing the greatest test of its authority in the months ahead as national governments fight recession and struggle to keep soaring budget deficits within the outer limits set by the Stability and Growth Pact.
Consumers may well have mixed views about sterling's decline. Shoppers should have greatly benefited from the euro's appreciation through lower prices for British goods sold here. But they have not. Many wholesalers and retailers have failed to pass on price savings resulting from sterling's depreciation. Consumers - to judge by the large daily exodus of cross-Border shoppers to Newry and Banbridge - have voted with their feet. And they have done so to secure in Northern Ireland what, so far, they have been denied in the Republic: namely, a proper recognition of the euro's huge appreciation against sterling as reflected in the lower price of goods in their shopping baskets.