Monday, October 26, 2009

The euro, sterling and Irish SMEs

Economist David McWilliams wrote in the Sunday Business Post yesterday that Ireland trades in a currency that is sky-rocketing against our two main trading partners, Britain and the US.
He says we need a hyper-competitive exchange rate. We need an exchange rate that allows companies to export, rather than making it difficult for them. Yet the finest minds in Ireland are doing the opposite.

Should the travails of the SME sector in exporting to the UK with a weak currency, be solved by quitting the Euro?

Like much else in life, there are no panaceas and why are Irish SMEs unable to develop markets in the 16 member country Eurozone with a population of more than 300 million?

McWilliams says exports took off after a devaluation of the Irish punt in 1993 but as many others do, he conflates exports from the dominant US-owned sector with indigenous firms.

Exports exploded off from the mid-1990's not because of devaluation but because in the years preceding it; Ireland was getting 25% of US greenfield investment in Europe and from the entry of Intel in 1989, Dell in 1990, Microsoft significantly extending its software operations and companies such as HP, opening big manufacturing facilities, coinciding with the US high-tech boom, exports from these firms dwarfed SME exports.

Have a look at the charts on this page, which show that the value of exports from domestic firms basically flatlined from 1991.

The devaluation had no impact.

As regards the euro, I assume Ireland wouldn't have joined the EMS if its main US FDI firms had objected to it.

Today, these firms remain crucial for the Irish economy.

The typical Irish SME does not export compared with counterparts in Europe and over the past decade, little headway has been made in developing markets in the common currency area.

The EMS has expanded from 11 to 16 countries and so there is a big potential market without having to worry about exchange rates.

Quitting the euro to help the SME sector is hardly a serious proposal.

A more serious treatment of the challenges facing SMEs would be to address the fundamental problems facing them.

Developing new markets where there is little tradition of doing this, unfortunately means that there are no short-term eureka solutions.