Currency rift poses threat to Irish firms

CONTINUING uncertainty about sterling joining the euro could cause havoc for Irish firms in the months ahead, analysts warned.

At present, Irish exporters to Britain are struggling against a much weaker sterling that has in punt/stg terms, fallen in value from 85p 18 months ago to 91p.

In euro terms, the exchange rate has gone to stg71p and if the slide continues Irish firms will be in over their heads, economists have warned. The major concern is an acrimonious euro/sterling rift in the British cabinet will lead to further serious weakness in the months ahead.

Since the euro's formation Irish firms have enjoyed the benefits of a weak exchange rate against the dollar and sterling. Until recently the dollar and sterling tended to move in tandem, but sterling has become more vulnerable as the debate over euro entry drags on.

It has annoyed investors who have ben selling sterling aggressively of late and they could continue that policy if the British cabinet fails to lay down clear guidelines for the currency.

The markets will be looking to Chancellor Gordon Brown to spell out the British position on euro entry before June 7.

Most analysts expect the chancellor to say the time is not ready based on his five tests for euro entry.

More crucial though, is that the chancellor gives a definite clarification on Britain's position on the euro.

The big fear is that post- June 7, the British government will fail to give the markets a clear guideline as to when it will consider joining the euro if at all.

Niall Dunne, the chief economist for Ulster Bank Financial Markets, believes the chancellor would ease a lot of the uncertainty if he makes it clear Britain will not consider joining euro until after the next election.

"The markets could handle that," he said.

Over the weekend however, further tensions emerged that could undermine sterling further and add to the concerns for Irish exports and the profitability of Irish firms.

Mr Brown was furious over remarks made by the leader of the House of Commons John Reid, who said if was a question of "when" and not "if" Britain joins up.

Mr Brown has always insisted debate has to be approached on the basis of "if" Britain joins.

Mr Reid's comments fuelled tensions further.

"In these uncertain times anything can happen and Irish industry will be watching developments closely," said Dan McLaughlin, the chief economist, Bank of Ireland.

"In the longer term, 91p to the euro isn't a problem and it is still below the average its been since we split with sterling," he said.

While it has come up a long way, Mr Dunne believes it is still not at a level that will crucify the economy in the long run.

However, if sterling continues to weaken and it starts moving closer to parity then Irish exporters face serious hardship and thousands jobs would come under fire, said Dr McLaughlin.