Has Ireland's Exposure to a Sterling Shock Changed?

The decision of the UK to opt out of EMU means that the Irish economy is stillexposed to shocks from changes in the valuation of sterling. However, over the 1990s the Irish economy has become steadily less dependent on the UK. In addition, the consequences of a fall in sterling from a position where it is overvalued will be less than from a position where it is in equilibrium. The analysis in this article suggests that, if a realignment of sterling occurs on its own, the effects on the Irish economy will be unfavourable, but the magnitude of any adverse effects will be limited andsignificantly smaller than if it had occurred five years ago. However, while exposure tothe UK economy has fallen, the Irish economy is now quite exposed to shocks to the US economy. A shock to the worlds largest economy, which would probably alsobring about a fall in sterling, could have serious adverse consequences for the Irish economy albeit temporary.