With the euro rising 5 per cent over the past year, Irish products have become more expensive on world markets, writes Cliff Taylor, Economics Editor.

THE sharp rise in the value of the euro is hitting the competitiveness of Irish exporters to non-euro countries. An exchange-rate index compiled by the Central Bank shows that the euro has risen by more than 5 per cent over the past year against a basket of countries outside the euro zone with which the Republic trades. A rise in the index indicates a loss of competitiveness as it makes Irish products more expensive on world markets.

About 60 per cent of Irish exports go to countries outside the euro zone. The January-September 2002 export figures show that around 23 per cent of exports go to the British market, with a further 17 per cent going to the US.

The Central Bank's nominal trade-weighted indicator (see graph), published each day, is one measure of how changes in the euro's value is affecting competitiveness. The index hit 97 yesterday, compared with 91.92 on the same day last year, a 5.5 per cent increase. During the euro's weakest period in mid-2001, the index went under 89 for a period.

The currency trend is "adding pressure in an already difficult situation", according to a spokesman for Enterprise Ireland, which assists exporting Irish-owned companies. It is particularly affecting companies exporting to price-sensitive sectors of the market, such as those selling sub-supplies like plastics, moulding and metals to British manufacturers. Their profits margins are hit as their customers will not accept price rises.

Companies selling food products to major British food chains are also suffering, with currency pressures adding to the difficulty of meeting demands from the big supermarkets for cheaper prices.

In the US market, exporters of products such as giftware are also affected. However, for Ireland's technology companies selling in the US, the impact is mitigated by savings on the cost of sales staff and other overheads maintained in the US. The flip-side, of course, is that companies importing goods from non-euro zone countries are making savings and this should reduce inflation.

From the point of view of the overall economy, research conducted by the Central Bank in 2001 provides an interesting perspective. Central Bank economists Mr John Kelly and Mr John Golden pointed out that between 1995 and mid-2001 the fall in the value of the euro (and before that the pound) had enabled Irish industry to improve its competitive position, despite higher inflation in Ireland than in our trading partners for much of the period.

Between 1999 and 2001 in particular, the euro's weakness more than compensated for a higher rate of inflation here than in our trading partners, allowing the competitive position of exporters to continue to improve. Now the concern is that the currency trend has reversed, while inflation remains high, providing a double whammy to exporters.

The Central Bank's 2001 research calculated that if the euro moved to around parity with the dollar this year and Irish inflation remained above our trading partners, it would result in a competitive environment worse than at any time since the mid-1990s, save for a short period in late 1996 and early 1997. In the event, the euro now stands well above dollar parity and the rate of inflation is considerably higher than the bank had expected.

The competitive bonus from a falling currency is no longer available to exporters to offset the impact of high inflation on their costs and this is likely to affect jobs and growth in the months ahead.