FOR A while, everything that could go right for the Irish economy did go right. The prolonged boom was built on the happy coincidence of good luck and good management.
The dark years of the 1980s curbed the growth in Irish prices and wages. Ireland's late education revolution raised the quality of the Irish labour force. Devaluations of the exchange rate sharpened competitiveness. The restoration of order to the public finances enhanced Ireland's attractiveness as a location for foreign direct investment. Ireland's insistence on remaining at the heart of Europe made the country an ideal platform for US companies to launch exports into the European Union. Together, these trends caused US investment to flow into Ireland in waves and the result was a boom.
Now, it appears that everything that could go wrong for the economy is going wrong. The domestic economy has turned downwards at precisely the same time that the global economy has suffered a series of severe and debilitating shocks.
At home, the fall in domestic activity has been precipitated by the collapse of the construction sector. The decline in housing completions this year will subtract 4 percentage points from this year's growth rate. Moreover, the downturn has not been contained within the construction sector. It is seeping through to consumer spending. Figures released this week showed that retail sales volumes in May fell for the fourth successive month. The available evidence suggests that the domestic economy will remain becalmed for some time to come.
Weak home demand should prompt Irish businesses to switch into export markets. But diversification into foreign markets is hindered, not only by slow growth in Ireland's traditional trading partners, but by the strength of the euro against sterling and the US dollar. As a result, the price competitiveness of Irish export sales has been blunted in the markets of the country's two largest foreign customers.
In times past, when the exchange rate was inhibiting economic development, the Irish currency was devalued. This course was followed to great effect by finance ministers John Bruton in 1986 and Bertie Ahern in 1993. But as a member of the euro, devaluation of the exchange rate is no longer an option.
Moreover, as the president of the European Central Bank, Jean Claude Trichet, makes clear in an interview published in this newspaper today, the bank's monetary policy will not be adjusted to accommodate the needs of member countries currently experiencing economic difficulties, such as Ireland and Spain. He argues that the ECB must look to the interests of the euro area as a whole, not to the needs of individual member states.
His message is clear: Ireland must find its own way out of its current economic difficulties, through restraining the growth of unit labour costs, structural reforms and budgetary interventions. Living with the euro is going to be tough from now on. The costs of failing to meet its exacting standards will be measured in increased business closures and rising unemployment.