The long bright years of Irish economic expansion are now giving way to days of a darker hue. The weaker outlook for the Irish economy is due, in part, to the continuing turbulence on the international financial markets. Global growth will be slower as a result. But Ireland's diminished prospects for growth are due also to a set of factors that are wholly home-made.
In the international arena the continuing turmoil on financial and foreign exchange markets has already exacted a heavy toll from Irish exporters. Over the past week the currencies of Ireland's major trading partners have weakened against the euro, making it more difficult for Irish enterprises to increase their export sales. The United States is Ireland's largest customer. The decision by the Federal Reserve Board - the US central bank - to cut its key interest rate by one-half of a percentage point to 4.75 per cent prompted an immediate decline in the US dollar's external value. For the first time ever, the dollar exchange rate has touched $1.41 against the euro. In Britain, the bungled handling of the Northern Rock bail-out caused sterling to slip to £0.70 against the euro, an exchange rate not seen for over a year. Britain is Ireland's second-biggest market and the most important destination for the exports of indigenous Irish companies.
The erosion of Irish cost and price competitiveness is the most important domestic factor undermining the economy's capacity for future growth. The deterioration in competitiveness has been signalled starkly by Intel's decision to cut its Irish workforce by 200, citing increasing cost pressures. Intel is the flagship of the Irish manufacturing fleet. It has invested some $7 billion in its Irish operations and is the largest industrial employer in the country, supporting a current workforce of 5,150. When a company of Intel's scale is feeling the heat it is time for policymakers to sit up and take notice.
In reality, Irish competitiveness has been in decline for some time, a product of excessive inflation - particularly in those areas sheltered from foreign competition - and a rising euro exchange rate. The extent of this deterioration has been masked from public view by the strength of the domestic boom. As the pace of expansion in domestic demand wanes, Irish economic growth can only be maintained at respectable rates by increased foreign demand for Irish goods and services. This simply will not occur unless cost and price competitiveness is regained.
Brian Cowen this week accepted that economic growth this year would fail to meet the Government's 4.5 per cent target. Growth next year will be slower still. Mr Cowen has been admirably consistent both in his commitment to the implementation of the Government's €180 billion National Development Plan and to the reduction in the rate of public spending growth. Both are necessary. Neither is sufficient. If competitiveness - the day-to-day cost pressures on Irish-based businesses - is the major question mark hanging over the economy's future, Mr Cowen needs to set about supplying an answer.