While you may have been watching the opening game of the World Cup on Thursday night, the Bank of England Governor, Mark Carney sent sterling surging towards a five-year high with his speech at the Mansion House in London.

This move in Britain could have a significantly positive effect on the prospects of the Irish economy.

In the real world of commerce, we have always depended more on Birmingham than Berlin.

As this column has written over the years, Ireland is tethered to the most incomprehensible exchange rate policy because we are use the euro – which is in effect Germany’s currency – yet we do far more trade with Britain.

More importantly, the stuff we sell to Britain, unlike the stuff the multinationals that are based here sell (or pretend to sell, according to the EU Commission), we actually own. These are Irish real goods, made by Irish people, owned by Irish people.

So when Britain is booming, it is good for the Irish economy in a much more amplified way than when other trading partners are booming.

In addition, because Irish people emigrate to Clapham rather than Cologne, when Britain is doing well, there are job opportunities for Irish individuals in Britain which Irish people fill. In contrast, job opportunities in Cologne, are rarely filled by Irish emigrants.

So at an individual level, if Ireland is not doing well, it is better for us that Britain is prospering than if Germany is prospering.

In fact, we can go one further and argue that Ireland’s economic stance in counterintuitive.

For example, the best situation for us is one where Germany and the euro are in trouble, like now with deflation, and Britain is booming.

This oddity is because when the eurozone is in trouble, our interest rates are low, easing the debt burden on hundreds of thousands of Irish households. If sterling is also likely to be strong during these periods, Irish exports to Britain more competitive. So it’s a double positive.

We are experiencing this virtuous combination at the moment.

This week, I am going to use three charts that explain what is going on and how it affects Irish exporters and Ireland.

On Thursday evening, a surprisingly hawkish Governor of the Bank of England, said that Britain would probably have to increase interest rates sooner than later because of the booming housing market. Immediately, sterling surged to $1.6987 against the US dollar and more importantly for us, it reached an 18-month high against the euro. The euro fell to 79.9p.

Look at figure 1. It shows what is happening.

Figure 1:  Euro/GBP FXChart 1 EurGBP

The euro has been gradually falling against sterling since early 2009 when it spiked up to nearly parity – at a time in Ireland when our domestic economy collapsed.

Due to our commitment to follow Germany, Irish firms saw their domestic market evaporate in 2009 and our currency appreciate (not depreciate) against our biggest trading partner.

It is amazing that anyone survived that negative double-whammy!

Now as you can see, sterling is strengthening and in the chart you can see the euro falling. This is good news for our exporters.

But will it last?

By saying that a hike in interest rates “could happen sooner than the market expects” Mark Carney changed the game and people now think British interest rates will rise faster than previously thought. This should keep sterling strong.

His words also have another psychological effect.

They signal that the world of permanently low interest rates of 0.5 per cent cannot last forever. The Bank of England now becomes the first major central bank to announce rate hikes since the financial crisis of 2007-2008. Many expect others to follow suit, such as the US Federal Reserve.

However, the ECB, which is still trying to defeat deflation, will lag behind. This difference in rates, between the Europe and Britain, is expected to increase and further strengthen sterling.

We can see this change in interest rates expectations in figure 2.

Figure 2: UK vs EUR interest rate expectations

Chart 2 Interest rates

What does all this mean for Ireland?

As Britain is our second largest trading partners, comprising roughly 16 per cent of our export market (and these are real things, not Apple’s makey-uppey exports), all this is highly advantageous to Irish exporters.

A while back, the chief executive of the Irish Exporters Association (IEA), John Whelan, admitted “the exchange rate with sterling has been a barrier to Irish export growth in recent years”.

He went on to say that “an ideal exchange rate is about 70p”.

This sentiment was reinforced by chief executive of Bord Bia, John Cotter, who claimed in 2010 that “one of the single biggest factors in the decline has been the depreciation of the sterling against the euro”.

If you doubt this, look at the final chart. It plots the movement of the sterling/euro exchange rate and Irish exports to Britain. You can see that Irish exports, as the head of the exporters claim, are highly sensitive to the exchange rate. A few cent movement in the wrong direction can wipe out the competitive position of many small Irish exporting companies.

Figure 3: EUR/GBP vs Irish Exports to the UK

Chart 3 Eurgbp vs Irish exports to UK

Quite how any regime could have given away the power over its exchange rate to Europe without much analysis remains one of the most extraordinary moves on the part of Irish establishment.

The exchange rate is crucial. Indeed Paul Volker, the former head of the Federal Reserve described the exchange rate as “the most important price in the economy”, I agree with him.

We know that sterling’s value is of huge importance to us. We are the only euro country with a land-border to the sterling area and we also have what I call the “Sainsbury’s Index” of exchange rates.

The Sainsbury’s index is the most telling indicator of over or undervaluation any exchange rate has. I am talking about Sainsburys in Newry

When the euro is too strong against sterling, the best indicator of this overvaluation isn’t some fancy chart, but is the eight-mile tailback at the roundabout in Newry of people from the Republic stocking up with cheap British booze for the Christmas.

In contrast, when sterling is strong, you’ll see no slabs of cut-price Tennents stacked in the boots of Toyota Corollas in the Sainsbury’s car park.

For the foreseeable future sterling and the British economy will be strong and European interest rates will remain low. This combination is good news for Irish exporters and this should be welcomed.

David Mc Williams hosts a discussion with a panel of experts next Sunday evening on the topic “South Dublin Houses – time to buy or time to sell”? at the Dalkey Book Festival. Tickets at www.dalkeybookfestival.org

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