In recent years Ireland's harmonised competitiveness indicator — the euro's exchange rate adjusted for Ireland's trading patterns — has increased, which implies a loss of international competitiveness. There are two reasons for this. First, Ireland trades relatively more with the UK and the USA, and both sterling and the US dollar have depreciated against the euro in recent years. Second, until last year, inflation in Ireland was higher than in the rest of the euro area while wages also grew rapidly. Part of these increases in labour costs and prices were justified as productivity growth in Ireland was higher than in the euro area. However, some of the growth in labour costs, in particular in recent years, was out of line with productivity developments. The National Competitiveness Council has outlined a range of wider cost factors that have also damaged our competitiveness.
As a small member of a currency union we have no control over the exchange rates we face and must focus on improving competitiveness at home. As such, we need to improve our competitiveness as quickly as possible and there are already a number of positive developments in this regard. Consumer prices in Ireland are now declining at the fastest rate in the euro area, by 2.8% in the year to October on the harmonised measure and by 6.6% using the national measure. In addition, we are also seeing the benefits of our labour market flexibility. Much available evidence points to recent downward pressure on wages in the economy. Unit labour costs, wages adjusted for productivity, are forecast by the European Commission to fall in Ireland this year, uniquely in the euro area. It is predicted they will fall by a cumulative 5% by 2010 and 2011, the largest fall in the euro area over the two years.
A highly educated workforce as well as the policies outlined in the Government's smart economy document will also help. While the falls in domestic prices, easing wage pressures and improvements in productivity are helpful, we must not be complacent as further improvements in our competitiveness are essential to take advantage of the global recovery.