Two years ago, an Irish exporter to the United Kingdom could expect to exchange £1,000 received from a British customer for about €1,400.

At the current exchange rate, the proceeds would be about €1,140, a reduction of 18%. Since the break in the sterling parity in 1979, reinforced by the UK decision not to join the eurozone in 1999, while Ireland took the plunge, Irish businesses have been exposed to volatility in the sterling exchange rate either as exporters or in domestic competition with UK imports.

Since the Brexit decision last June, the decline in sterling has brought this reality home, particularly to those in the food business for whom Britain remains a key market.

Even if the recent sterling weakness could be expected to reverse, and there is no guarantee that it will, the problem of volatility is likely to remain. The UK will be embroiled in Brexit negotiations until March 2019 and there is every chance that unresolved issues about trade access will remain through the subsequent years.

Some form of post-Brexit transition deal now seems likely and it could mean a deferral of uncompleted negotiations. This is a formula for exchange rate instability – until a clear framework for the UK’s long-term trade regime is clarified, every twist and turn in negotiations will provoke a reaction in the foreign exchange markets.

Exposed

Irish businesses exposed to sterling, either as exporters or through import competition, already regard volatility as a business headache regardless of the ultimate value of sterling. Today’s rate of around 87p to the euro is unwelcome and has already destroyed margins for many. But it would be more survivable if it did not fluctuate too much.

A long-run rate of 87p with fluctuations from 85p to 89p is a very different proposition from an average of 87p with fluctuations down to 80p and up to 95p. The Brexit negotiations could easily deliver the latter.

Any firm with payables or receivables in sterling can seek cover from the banks, eliminating their exposure for the agreed period. But this cover is not cheap and gets more expensive with greater expected volatility. The alternative is geographical diversification in trade patterns away from the UK.

There is a powerful incentive for diversification anyway, since British departure from the single market and customs union will create tariff and non-tariff barriers absent elsewhere in the EU.

Avoidance of exposure to exchange rate volatility could turn out to be a further spur, although it is not new: Irish business has had to deal with it for almost four decades.

The diversification challenge posed by Brexit and possibly intensified if the sterling exchange rate gets to be more volatile, should not be underestimated. Ireland does not have raw commodities to export, free to switch destinations at low cost.

Food products in particular tend to be customised to specific markets since tastes vary geographically. Some producers have intangible investments in consumer awareness and distribution channels which will be seriously devalued if destinations have to change.

A cargo of refined petroleum can be re-directed on the high seas but things are not so simple with most of Ireland’s merchandise exports.

The Government has indicated that it will be providing assistance to firms facing adjustment costs. To comply with EU state aid rules, this will have to be temporary and confined to firms with realistic prospects of successful adjustment.

Handouts

Permanent corporate welfare handouts will not be approved and will certainly not be funded by the EU. Given the imminent exit of a large net contributor, namely the UK, the EU budget will be under pressure anyway, so the prospects of large-scale financial assistance from Brussels are poor.

It is worth remembering what happened on the last occasion when Ireland faced an abrupt change in its external trading environment, subsequent to EEC entry in the 1970s. On that occasion various tariff-protected industries, mainly in Dublin and Cork (remember car assembly?), were faced with insurmountable import competition and disappeared. The CAP brought offsetting benefits to rural Ireland.

This time the abrupt change is the likely contraction of the British market across a wide range of sectors, with rural Ireland more exposed than the cities.