Weak sterling has created problems for exporters, and for those competing with UK firms in home and third-country markets, on numerous occasions since the Irish and British currencies parted company back in 1979. Those difficulties came even though the UK was in the EU’s single market during that time.

Given the sharp sterling decline that has occurred, there are two distinct headaches and they are both serious.

While it is clear that the weakness in sterling is the market’s reaction to Brexit, it is an additional problem to the difficulties that will arise as the form of the UK’s departure from the EU unfolds.

There are no easy answers for firms exposed to the sterling exchange rate. In time, inflation in the UK will trend upwards, if the exchange rate weakness persists and the competitiveness gains for UK firms will be eroded. However, this will take many years and some Irish firms are already in trouble. It has been reported that some mushroom producers have already thrown in the towel and there must be many other small firms contemplating layoffs.

Ireland no longer has a currency, since the Irish pound was abolished in 1999. The currency we use, the euro, has no exchange rate target against other currencies and fluctuates freely. The recent extended period of weakness against both sterling and the dollar helped to spur economic recovery here but, at least against sterling, it looks like the tide has turned. This is a game of swings and roundabouts; there is no practical way to insulate companies against fluctuations in their competitiveness. If the UK had joined the euro in 1999 the problem would be far less acute, but it chose not to do so. The Irish government decided to abolish the Irish pound and adopt the euro regardless. That decision was a gamble that the sterling/euro exchange rate would not be too unstable. That gamble looks like it has come unstuck following the UK’s referendum vote on 23 June last.

Free trade

Aside from exchange rate movements, the ending of a long-established free trading regime and the return of tariff, quota or other restrictions are negative developments. The dismantling of a free-trade zone is not a common occurrence, but its directional impact on economic activity is unambiguous. Free trade encourages importers and exporters to find the lowest-cost and most profitable geographical patterns. Irish firms, which rely on the UK market, have chosen to route their business there for good reasons, including lower operating costs and product acceptability.

It is foolish to pretend that the export flow can be re-routed to other EU markets at the flick of a switch

Someone who ships food items to Manchester has long had the option of shipping to Milan or Munich under the same free-trade regime. The choice of Manchester is not arbitrary, it is the choice which delivers the best margins. It is foolish to pretend that the export flow can be re-routed to other EU markets at the flick of a switch. This may be possible for commodity exports, but it is not feasible with branded consumer goods or services.

Equally, the substantial reliance of Irish imports on UK sourcing will be interrupted, at further cost. These costs are due to the retreat from free trade and would arise even if the pound had an exchange rate tied to the euro.

It is possible for a country to withdraw from the EU while minimising disruption to trade relations and with limited damage to costs and margins. The UK seems unlikely to opt for staying in the single market and the customs union though.

EU officials and political leaders have been explicit that such solutions are not on offer without the continuation of free movement of EU citizens into and out of the UK.

This means a hard Brexit, that is, one which will entail substantial costs of trade disruption. Once the dust has settled it will become clear that a hard Brexit means long-term damage to the UK’s economic prospects.

Policies

Demands that the Government should implement policies which Brexit-proof the Irish economy are whistling in the wind.

The government cannot restore a more comfortable exchange rate against sterling, nor can it reverse the result of the Brexit referendum.

There will be opportunities for damage limitation at best, but even these are unclear, given the absence of clarity about the UK’s intentions.

Complaints that the Government has done nothing, or done too little, are premature. The economic outlook has worsened because of Brexit and the sterling slide: a more cautious budget stance is the best response.