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Charlie McCREEVY

European Commissioner for Internal Market and Services

Opening Address

Price WaterHouse Coopers Conference "Winning in Challenging Times"
Dublin, 29 September 2008

Good morning Ladies and Gentlemen:

I am delighted to be here this morning to open this conference.

The next 18 months are going to be challenging - for Ireland, for Europe, and indeed for the global economy: Pressures in financial markets remain significant and there will be second round effects for financial institutions as rising bad debts in asset classes beyond sub-prime mortgages emerge. But the actions that have recently been taken by the authorities both here and internationally will, I hope, underpin confidence in the long term stability of our financial system.

As a small open economy, Ireland will inevitably continue to be buffeted by the international slowdown. Ireland's response must - and I believe will - be based on a recognition of the need to ensure that we retain and build on our competitiveness and approach the difficult time ahead with determination and common sense: Those who make things happen in the economy – those who set up or expand businesses, those who innovate and invest – must be incentivized to continue to do so: That is necessary in good times. But it is especially imperative in tougher times when risk-aversion is higher and the need for investment and innovation greater. So on reward for effort and reward for taking risk there should be – and I believe there will be - no U-turns.

After more than a decade of strong and sustained growth, rising living standards, and nearly full employment, some people – had begun perhaps to take too much for granted. The economic slowdown will provide a reality check - and an opportunity for us to focus on the resources and policies we need now to sustain and build upon our competitive advantages and to identify and develop new sources of competitive advantage which we will need to ensure that we remain a high value added economy capable of supporting the living standards to which people have become accustomed. Nothing stands still. Sustaining any country's position in the competitiveness league tables is always a challenge. But without vigilance, flexibility, and continued reform, slipping down those league tables will become inevitable. Building upon sources of competitive advantage and developing and exploiting new one's is a complex task. But when we look at the studies on Ireland there are some clear priorities and imperatives: We must continue to invest heavily in "best in class" infrastructure, in the development of a more flexible, more dynamic labour market, and in an education system that enhances the skills, productivity and the capacity of our future workforce to innovate.

And in the midst of this financial turmoil let's be clear about one thing: this country has come a very long way over the past 15 years. Employment has grown dramatically. Standards of living have soared. Our debt-to-GDP has fallen substantially and remains among the lowest in Europe. And we now have a thriving enterprise culture. The wealth that has been created has not been dissipated and we can and we will get through the current difficulties provided we remain fleet-of-foot, flexible, opportunistic and entrepreneurial.

But let us be clear too: No part of our economy can be insulated from change - the kind of change that has taken place right across the private sector over the past 20 years and that has enabled us to adapt to the much more challenging markets in which we now compete.

No longer in private sector businesses are there guaranteed jobs for life. No longer are there universal fixed annual increments. Going too are the guaranteed defined benefit pension schemes. No longer annual pay rises determined uniformly regardless of performance or merit. In some of our more conservative private sector institutions the transition to performance based structures was gradual, starting at the top, and year by year as high performing employees came to recognise the benefits of such schemes they progressively spread down – and were accepted – throughout the ranks, and increased the pool of high performers delivering real results.

In the much changed economic environment that lies ahead governments everywhere must move the public sector in the same direction. No longer paying for getting older. But paying for getting better. There is no future in keeping things as they are. The current arrangements are not sustainable even over the medium term, let alone in the long term. Nor are they fair – not least to the very many high performers in the public sector who deserve incremental rewards if they deliver higher productivity and real economies that sustain and improve the public services, while reducing the cost of delivery to the taxpayer.

In the private sector businesses that deliver thrive and their employees thrive with it. Business that deliver inefficiently, by contrast, are driven under and their employees are driven out.

Not so in the public sector - where a minority of public servants - and it is a minority - are paid generously for delivering poorly, and they know they have a job for life.

As the economy slows the ratio of those working in the public sector to those in the private sector rises. Public sector employees are kept in work while increasing numbers in the private sector are put out of work. As a result tax revenues fall, social spending pressures rise, and the burden on a less buoyant and less profitable private sector rises to

fund ever-increasing public sector escalation. That creates its own vicious circle. It diminishes competitiveness and it costs more private sector workers their jobs. Is that fair? No. Is it sustainable? No. Can it be changed? Yes. In the next phase of economic development public sector pay rises must be matched by real, meaningful rises in public sector productivity. If governments, trade unions and public sector workers themselves don’t face up to this basic fact then the goose that lays and funds the golden egg of job security and Rolls Royce public sector pensions really will be killed. In my 30 years in public life I have worked and continue to work with public servants of outstanding quality and commitment. I am convinced that those who perform – and perform well - are in a big majority. But I also know that within the public sector there is much to be overhauled; The restrictive practices. The culture of sick leave. The absence of material incremental rewards for outperformers and the wholly inappropriate cushions for underperformers. The lack of flexibility in terms of pay differentials to facilitate the recruitment and retention of scarce but vital skills, higher level maths and science teachers for example. For Ireland, a relatively high cost economy, the development and availability of the right skills – especially in mathematical and scientific areas - is indispensible to the maintenance of current living standards and to the continued inflow and protection of foreign direct investment. That's why there must be flexibility to pay more to attract scarce but vital resources to underpin long term economic growth.

As far as our infrastructure is concerned, there have been big improvements in many areas. But there is more to be done. We need to breath more competition into our transport and energy sectors and loosen the grip of those who stand in the way of reform. We need to consider privatizing our ports which international competitiveness studies have shown are well below par.

The increased incentive elements in remuneration packages, the increased gaps that have been opened up between outperformers and underperformers in the private sector lifted the performance of nearly every one of Ireland's major companies over the past 15 years, and raised the living standards of the management and workers who made it happen, as well as the returns to investors, and the living standards of pensioners whose pension funds are invested in those companies. This improved performance delivered more tax revenues while facilitating lower tax rates to fund social spending, public capital programmes, public sector pay and much more besides. Because I know that the public sector is as well populated with people who want to outperform as the private sector, but by virtue of restrictive practices are prevented from doing so, I know that public sector employees would benefit from carefully crafted reforms along the lines I am suggesting.

Before I conclude, let me say this: As a small, open economy Ireland can continue to achieve sustained and substantial success by doing just a small number of things well. But the line between success and failure is a fine one. In these more difficult times, all of the stakeholders in our society must unite and work together to ensure that as we emerge from this turmoil, we do so on the right side of that line.

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