For Philip Halpin, there is no question but that Ireland’s economic future lies with the euro. “Euro membership has been good for Ireland, it’s good for the export sector, it’s the optimum currency strategy: stay exactly as we are,” he states. “It’s imperative that we get a ‘yes’ vote in the referendum because we may need to access the European Stability Mechanism funding in 2013,” says Halpin. It is a safety mechanism for the country, however, as Ireland is “actually insulated and protected as we are.”
Changing currency involves “huge costs” and “a big logistical exercise”, Halpin insists, “and I think the last thing the Irish economy needs at the moment is any further financial disruption or any instability.”
Halpin’s view mirrors that of most Irish exporters. The most recent ‘export Ireland survey and international trade finance review 2011’, published in November, shows that 90 per cent of exporters did not believe the Irish economy would benefit from leaving the single currency, an identical finding to the 2010 survey.
Despite his support for euro membership, “the euro zone problems are far from over,” says Halpin. “There are still problems in Greece, Spain, Italy. We have a French presidential election coming up.” While the three-year long-term refinancing operations (LTROs) from the ECB have “helped in the short term”, the problems remain. “While it’s provided liquidity to the banks for the next three years, in three years’ time they’re going to have to replace that,” he states.
“How are they going to replace it? Will the market have the appetite to absorb €1 trillion in terms of a bond issue?” wonders Halpin.
Furthermore, the lending is “quantitative easing by the back door.” The former Chief Operations Officer of National Irish Bank summarises the consequences of these LTROs: “The banks have so far to date, used the funds to purchase sovereign debt and in fact, in essence, what’s happening here is that undercapitalised banks are putting additional, risky, sovereign debt on their books.”
The situation is “far from resolved”, and while “all the talk so far has been about fiscal discipline” Halpin believes that for a resolution to the crisis “we need to talk about fiscal union.”
In the “unlikely event” of the euro collapsing, Ireland will have three main options, according to the IEA’s adviser: re-floating a national currency, a currency pegged to sterling or a currency pegged to a basket of currencies, e.g. the dollar and sterling.
On the possibility of floating an Irish currency, Halpin states: “I don’t think that’s a runner. I think it’s a highly risky strategy.” Ireland has “always had monetary union or a fixed exchange rate link since the foundation of the State, and indeed since before the State was founded.”
The significant devaluation of a free-floating Irish currency could lead to capital outflows, in turn possibly causing a run on the banks. This “may in turn result in term deposits being frozen and a bank holiday, for example, for about five days.”
Interest rates would rise, Halpin believes, adversely impacting export performance and foreign direct investment. “And one devaluation always leads to another devaluation,” he adds. Halpin also predicts that with devaluation “there certainly would be an increase in bankruptcies.”
Establishing a currency linked to sterling has advantages and disadvantages, according to Halpin, but it would be a better option than a free-floating currency should the euro collapse. With an Irish currency linked to that of an “increasingly isolationist” Britain, it would mean “following their macro-economic policies, interest rates” and “importing to some degree their inflation,” Halpin believes.
However, he makes the contrast: “The advantage of that is there would probably be only one devaluation at the outset, whereas with a free float you have a devaluation at the outset and the expectation of future devaluations, and it would be much larger.”
The 2011 survey of exporters showed only 6 per cent of respondents have made financial arrangements for the collapse of the euro. This surprised Halpin. “While there’s no blueprint,” he states, “you’ve got to build in scenario planning.” Companies have to “look at their balance sheet and see where their exposures are.” This means corporate treasurers and finance directors protecting a company’s assets and managing risk, i.e. interest rate risk, foreign exchange risk and currency risk.
Despite the uncertainty over the currency, and Ireland’s signature of the fiscal compact, “exporters do remain upbeat.” He forecasts that the rate of increase in export growth this year will be “a bit less than we had all expected because of the downturn in Europe, and because of a weak UK.”
Ireland has been heavily reliant on the UK and the euro area for exports (54.4 per cent of goods in 2011, 56 per cent of services in 2010). The BRIC countries (Brazil, Russia, India and China) accounted for only 3.8 per cent of total goods exports in 2011, compared with 20.9 per cent among the EU27.
In 2011 Irish exports of goods to the BRIC countries grew by 7.2 per cent, while EU27 growth was 20.7 per cent.
“Put yourself in the position of any business,” Halpin says as he explains the reliance on British and European markets. “It’s always easier to expand or grow in a market where you already have a presence.” While it is easier for exporters to sell closer to home, “and you’ve got to retain those markets and continue to grow those markets to be successful,” Irish exporters have increased their focus on the BRIC countries, where opportunities such as dairy products, and the drinks market in India, now exist.
“Russia is a huge market,” he remarks, particularly as “the retail sector is now moving out into different cities other than Moscow, so that represents opportunities for own branded, own-labelled type products.”
There is a very competitive environment for access to these markets, Halpin accepts. “So yes, we need a relentless focus on cost competitiveness.”
Taxation is a component of competitiveness. The IEA survey found that among non-Irish owned companies, 42 per cent said an increase in corporation tax would have a significant effect on the decision to locate in Ireland, with a further 13 per cent saying it would have a big effect. The findings show “how important the corporation tax rate is to Ireland,” says Halpin.