Dáil Éireann debate -
Wednesday, 22 Mar 1995

Vol. 450 No. 8

Adjournment Debate. - Currency Exchange Rates.

Mr. M. McDowell

I am grateful for this opportunity to raise the implications for Irish industry and employment of the present difficulties our economy is experiencing as a result of the difference in exchange rates between the Irish pound and sterling and the devaluation of the Irish pound within the ERM. The Minister for Finance's contribution over the last 96 hours to this issue has raised considerable problems from the point of view of our economy. He has spoken about two very different policy priorities. He indicated a desire on the part of the Irish Government to keep the Irish pound within the ERM and in touch, however much at a distance, with ERM currencies. He indicated that it was also Government policy to maintain a certain relationship with sterling.

The problem with enunciating two differing policy objectives is that we have no control over the relationship of sterling to the ERM and, therefore, the Irish pound in so far as it is loosely attached to the ERM four fast track currencies, is being dragged in two directions. I do not believe Ireland must make an irrevocable decision now one way or another on the question of economic and monetary union and, because we favour European Monetary Union, must commit ourselves to the ERM regardless of the consequences.

The ERM which Ireland joined was a basket of currencies including the lira and the pound sterling. It was a balanced basket of currencies because the pound sterling was a party to the arrangement. It reflected economic realities in Ireland. The time has come for the Government to admit that in large measure our economy is integrated to a significant extent with the UK economy. If one goes into a tobacconists or a supermarket and looks around at the products on offer one finds that Ireland, simply in terms of products, has much more in common with the United Kingdom in many respects than with any other country in the European Union.

In addition, to a significant extent, Ireland forms a joint labour market with Britain. Trends in wages and employment in Britain have a direct effect on trends in wages and employment here. Irish producers are in direct competition with English producers. Irish industry is directly affected by the value of the IR£ vis-á-vis sterling in a way it is not affected directly by any relationship with any other currency.

The time has come for us to admit we have an economic relationship with the sterling area which cannot be ignored. Irish people who are either employed in, direct or own exporting enterprises to the United Kingdom are in cut-throat competition with English companies who are their natural competitors. The time has come for us to admit also that we cannot ignore the pound-punt exchange rate and say it is simply a matter on which Irish industry will have to endure the pain if it goes significantly wrong so far as Irish exporters are concerned.

You cannot say to an Irish company: "look to your cost structures and try to make economies" and hope that things will go right. As a country we must offer Irish industry and Irish exporters and, in particular, employment intensive Irish exporters more moral encouragement than merely asking them to look to their own cost structures if things become difficult. In that respect, I emphasise the problems which arise from the different tax wedges on employment in the United Kingdom and here.

A company which is producing a competing product in Drogheda with one in Newry faces a radically different tax regime. It is simply not good enough for the Minister for Finance to say that Irish companies must look to their cost structures to enable them to survive the difficulties with the sterling exchange rate. I am not suggesting — and I want to make it clear — that Ireland should withdraw from the ERM but what I am suggesting is that the Government must reflect the basic economic realities which Irish industry faces and with which Irish employment has to contend. In the past 96 hours the Minister for Finance has shown no appreciation of the real conditions of Irish industry and Irish business in the remarks he has made on the subject of our relationship with the pound sterling.

Minister of State at the Department of Finance (Mr. J. Higgins)

By way of rebuttal of what Deputy McDowell has said, the Minister for Finance has been consistent in his capable and competent handling of the currency crisis. I can understand the concerns of exporters arising from the situation in the foreign exchange markets. However, I would point out that while undoubtedly the IR£ has appreciated recently against sterling, that appreciation has not been very large and it should be providing offsetting benefits for some firms, in terms of lower import costs. The IR£ has depreciated against the Deutsche Mark and other ERM currencies, a factor which should generally be of advantage to exporters to EU member states other than the UK, while its value against the US dollar has remained well within the range of normal experience. Overall, that is on a trade-weighted basis, the value of the IR£ has fallen marginally because of the recent currency fluctuations.

As regards exchange rate policy, the Minister for Finance said in his statement of 19 March, and has repeated since, that his immediate concern is that the IR£ should trade more comfortably within the ERM band; and he acknowledged the implications of this for the IR£'s rate against sterling. Last night, as soon as it became apparent that a remark of his in the European Parliament yesterday afternoon had been quoted out of context, he issued a statement reiterating what he said over the weekend.

As stable exchange rate, flowing from our participation in the zone of stability which the ERM represents, has helped to underpin the policy approach within which low inflation has been achieved in recent years. This low inflation is central to our longer-term strategy, based on moderate wage development, and continuing improvement in the public finances, to strengthen our employment performance.

As regards the impact of recent currency movements on exports, the Minister for Finance met representatives of IBEC this morning at their request to discuss the situation in the currency markets. There was a very useful discussion in which the IBEC representatives expressed their concerns about the impact of currency market developments on the competitiveness of those sectors which are in competition with UK-based producers. The Minister has asked his officials to maintain close contact with IBEC on these issues.

While the concerns in some quarters about the impact of a higher exchange rate against sterling are appreciated, it is necessary to put recent developments in a proper perspective. Over recent years the Irish economy has achieved very strong economic growth and increased employment against a background of low inflation, a balance of payments surplus and firm control of the public finances. This greatly improved growth and employment performance has been achieved at a time of significant appreciation of the IR£ against sterling. While I accept that the further appreciation of one to one-and-a-half pence of the IR£ against sterling in recent weeks is of concern to firms competing with UK based producers, I do not consider that it should pose a significant immediate threat to jobs or exports having regard to the fundamental strengths of the Irish economy.

The Government has a role in helping to make the economic environment as conducive as possible to economic activity generally, including exporting. The present climate is characterised by low inflation, sound public finances, a very high level of investment under the National Development Plan and moderate wage developments under the Programme for Competitiveness and Work. The prospects for 1995 and the medium term are for continued strong economic growth building on our strong performance in 1994. Real GDP is projected to grow by over 6 per cent in 1995. Substantial increases in investment and private consumption underpin this outlook, as well as a continued strong export performance. Despite this strong growth, inflation is expected to remain subdued.

The recent budget contained measures, including improvements in income tax, PRSI and corporation tax, which are aimed at improving the economic climate further. These measures were, in part, specifically aimed at helping those indigenous Irish firms with traditional markets in the UK. The improvements in income tax and employee PRSI will underpin the moderate wage developments enshrined in the Programme for Competitiveness and Work. The employer PRSI measure is of special importance to firms in the export sector: the increase in the income threshold below which the lower 9 per cent rate of employer PRSI applies will support some 170,000 existing jobs and will help to reduce labour costs in employment intensive sectors which are particularly dependent on the UK market. The income tax improvements in the 1995 budget will cost the Exchequer some £111 million in 1995 while the PRSI concessions in the budget will cost some £93 million.