Sterling's decline takes toll on Ireland

Almost 20 percent of Irish exports go to Britain, where companies are being hit on their sales or the translation of profit back into euros. Bloomberg News

DUBLIN: Hugh McGee is cutting the price of Guinness by about 20 percent at his bars and hotels in the Irish town of Letterkenny to keep customers coming across the border from Northern Ireland after the euro's surge against the pound.

McGee reduced the price for a beer this month to 3.50 euros ($5.18) at his hostelries after the pound's 12 percent drop against the euro in the past year led customers from the UK province of Northern Ireland to stay home.

"We can't devalue, but our neighbor can and has, and left us high and dry," he said, adding that sterling is a "huge" problem.

"You've got to try and keep the Northerners coming." The pound's plunge is a threat to Ireland as its economy shows signs of emerging from the worst recession in modern history.

Consumers are heading north in search of cheaper food and televisions, UK tourist numbers are sinking, and exporters such as food company Kerry Group Plc and C&C Group Plc, the maker of Magners cider, are suffering in their largest European market.

"It's nothing but bad news to Irish exporters," said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.

"Sterling is a bigger negative force than in any other eurozone country. It's certainly something we could do without."

Almost 20 percent of Irish exports go to Britain, where companies including Kerry, DCC Plc and Greencore Group Plc, which supplies more than 100 million ready meals to the UK, are being hit on their sales or the translation of profit back into euros. By contrast, 8 percent of exports from Germany, Europe's biggest economy, go to Britain.

Independence

Ireland gained independence from the UK in 1922 and ended its link with the pound in 1979 to join the European Monetary System.

It then gave up the Irish punt to join the euro area in 1999. As a UK province, Northern Ireland continues to use the pound.

The euro reached 94 pence earlier this month, putting the equivalent old Irish punt at 1.18 pounds, or at a level "never approached" during its 20-year independent life, according to central bank Governor Patrick Honohan.

Sales to the UK fell 23 percent in the third quarter, more than double the decline recorded in the first half, data compiled by the Irish Exporters Association show.

Kerry Group said Aug 25 that the exchange rate led to a "considerable contraction" in Irish sales to the UK.

To counter the slump, Limerick-based toolmaker BMS Ireland now offers a set of three diamond wheels, used in grinding machines, for the same price it used to offer for four to UK clients. Twelve percent of BMS sales are in the UK.

"You can't really raise your prices in this environment," Managing Director Liam Ryan said in an interview.

Bank of England

The pound has been pushed lower against the euro after the Bank of England cut borrowing costs to 0.5 percent from 5.75 percent and it began a 175 billion-pound asset-purchase program in March to revive the UK's economy, which is mired in its longest recession on record.

A positive for Irish Finance Minister Brian Lenihan as he grapples with a slumping economy is that the weaker pound makes imports cheaper. A third of Irish imports come from the UK. Prices dropped 3 percent in September from a year earlier, as clothing and shoe costs fell 13 percent, and food and soft drink prices dropped 6 percent.

"The depreciation of sterling does in time lead to a reduction in the cost of living here," Lenihan said.

Hugh McGee said sales at his seven bars, nightclubs and hotels fell 15 percent to 18 percent this year, as locals went north and Northerners stayed home. Against that backdrop, he opted to cut his alcohol prices for three months through next January. "It's a survival kit," he said. "Beer is cheaper than water in some shops over there."

Bloomberg News

(China Daily 11/02/2009 page11)