If Britain stays out in the cold we'll suffer exposure

AS Ruairi Quinn heads off to Verona this weekend, he should pack copy of a paper on the exposure the Irish economy to sterling by Seamus Bannon of the Irish Trade Board. It demonstrates clearly the exposure of much of Irish industry to the movements of the British currency and highlights the dilemma which the Government will face if, as looks likely, Ireland qualifies for monetary union but Britain, at least initially, opts out.

The meeting in Verona will discuss what to do about currencies which stay out of the planned monetary union. This is not only an issue of major importance for Ireland, but also for France and Germany, faced with competition from southern neighbours like Italy and Spain, which are unlikely to qualify.

Mr Bannon's paper, presented to, the Statistical and Social Inquiry Society, shows clearly the dependence of Irish industry on the British markets and sterling. It is structured around an interview based survey of the 240 largest manufacturing firms and a postal survey of 1,000 small and medium enterprises (SMEs).

Industry's exposure to sterling is, of course, much less than it was before Ireland entered the EU, when the British market accounted for two thirds of exports. Now about 27 per cent of exports go to Britain, but the figures since 1990 suggest the decline is bottoming out. The same trend is evident in the import figures, with imports from Britain accounting for 36 per cent of the total in recent years.

In terms of currencies, the dollar is the most important for exporters, accounting for just over 31 per cent of total transactions, with sterling at 26 per cent and the deutschmark at 12 per cent. This reflects the large exports by US owned multinational subsidiaries.

The consumer products and food sectors, both large employers, have a high exposure to sterling, with a large proportion of firms billing more than 60 per cent of exports in the currency. There are a sizeable minority of firms in the engineering sector in the same position.

An analysis of the SME survey by the Irish Trade Board highlights the financial impact of a rise in the value of sterling. Because of the low profit margins in this sector, even a 1 per cent depreciation of sterling against the pound leads to a dramatic increase in the number of firms classified as having low profitability from 20 per cent to 85 per cent of the total.

This undoubtedly overstates the case, as firms would adapt through cutting costs and market diversification. But it does highlight the vulnerability of SMEs to sterling fluctuations.

The analysis highlights the importance for Ireland of the discussion in Verona on the relationship between currencies inside the monetary union and those outside. It is an informal meeting, so no decisions will be made, but Mr Quinn is among the leaders hoping for clear political guidance to be given by the meeting.

Unfortunately for Ireland, Britain is stoutly rejecting any suggestion that states which do not enter a monetary union should be obliged to enter a kind of Exchange Rate Mechanism Mark II.

France has backed away from the idea and, while a new ERM may still be formed, it is unlikely to be obligatory. Instead, states outside the monetary union may be obliged to have their economic performance monitored to try to avoid the kind of major policy differences which would cause currency swings. It is all still a bit woolly making it very difficult to weigh the pluses and minuses for Ireland of participating in any monetary union.

But whatever about the discussions at EU level, Mr Bannon's paper points to another area needing attention. Far too few SMEs engage in proper management of their currency exposures, and both the companies themselves and their banks need to be much more active in this area. This would improve the outlook for industry, no matter what happens to the plans for monetary union.