Sterling-euro exchange fluctuations have returned to haunt the Irish agri-food industry, amid claims by some currency analysts that the two currencies could converge to equal value within 2017.
After the UK voted in June, 2016, to leave the EU, the Euro strengthened by 13% against the pound sterling. The weakness and volatility of sterling negatively affected the competitiveness of Irish exports, reducing the value of trade by an estimated €570 million.
As a result, the sterling versus euro relationship, and how to manage the increased currency volatility, became the main focus of Irish food and drink exporters in 2016.
But with major financial institutions such as Morgan Stanley, HSBC, and Citi recently predicting sterling and the euro will converge to equal value within months, exporters again face the possibility of hundreds of millions of euro being wiped off the value of their trade to the UK.
The predicted pound and euro parity would be a historic first in the EU’s single currency’s 18-year history. However, many currency traders say it will not happen, with uncertainty about what a post-Brexit Britain will look like driving down sterling now, but sterling likely bounce back within the next 12 months, as the Brexit picture becomes clearer.
According to JP Morgan, one of the major financial institutions, euro-sterling parity will not happen without an outright UK recession, or the failure of Brexit negotiations.
There could also be major currency effects from decisions made this week at the annual meeting which begins today of top central bankers and economists in the US, where the European Central Bank might unveil plans to peg back the euro.
The euro, one of 2017’s best-performing major currencies, has increased more than 6% in value compared to the pound since the start of 2017, and would have to gain an extra 12% in value to reach £1. In June 2016, the euro was worth only 78.48p, a comfortable benchmark for most Irish food and drink exporters.
As the euro strengthens against sterling, food exporters in Ireland are particularly exposed, due to their relatively low profit margins.
They cannot expect lenient treatment from UK importers, who have pledged to keep prices low, to protect struggling British consumers, and of course to protect their market shares in the intensely competitive UK grocery market.
Many UK importers refused to increase prices for Irish produce last year, when sterling weakness in the autumn left payments worth 15% less than they were before the Brexit vote in June. Irish mushroom exporters were notably affected, due to 90% reliance on the UK market, and the IFA mushroom growers committee chairman, Gerry Reilly, said last week the recent sharp devaluation, crossing the crucial 90p to €1 mark, has major repercussions.
“The sector has already lost a significant number of producers due to the initial impact of Brexit. All growers have taken measures to mitigate the impact of exchange rate volatility such as hedging. However, at current rates this is not sustainable.”
Mr Reilly called on the Government to directly support the sector, through low-cost loans, and EU support measures.
However, if the euro approaches parity with sterling, competitiveness of all Irish food exports to the UK will be seriously dented.
The UK takes 54% of our beef exports, more than 60% of cheese exports and 30% of our total exports of dairy products and ingredients, 61% of Irish pigmeat exports, 44% of our prepared foods exports, 29% of our beverage exports, 84% of our poultry exports, and 28% of our sheepmeat trade. “The more sterling weakens, the greater the challenge for exporters to the UK market,” warned Cormac Healy of Meat Industry Ireland (MII).
The Government must secure the necessary state aid flexibilities in Brussels to allow short term supports in the form of an Enterprise Stabilisation Fund or Employment Support Scheme” said Mr Healy.
June figures show vital Irish beef exports to UK still buoyant: