THE PRIVATE business sector is losing business, going bankrupt and cutting full-time jobs. The official rate of unemployment says that 13 per cent of the workforce is unemployed but the reality is different. The official figures disguise the reality. Private Sector full-time employment fell from 1,417,000 in autumn 2007 to 1,078,000 in spring 2010. This is a fall of 339,000 or 24 per cent over the period. The fall in full-time employment in the Private Sector is continuing and may be down by 30 per cent by Christmas.

Private businesses have to compete with businesses at home and abroad. The Sligo retailer has to compete with the Enniskillen retailer. The childcare business in Dundalk has to compete with the childcare business in Newry. The Navan furniture maker has to compete with German companies. All our private sector businesses are at a disadvantage because our costs are too high.

We have to try to ensure that our prices and costs are in line with those in the UK and Eurozone countries like Germany. This article will look at changes in Irish and German costs and prices over the last 12 years.

The German economy is the dominant economy within the Eurozone. The widespread perception in Germany that Ireland is too expensive is affecting investment decisions and tourism.

We have to regain our competitiveness with Germany. When we joined the Euro and finally fixed the value of the Irish Pound we chose a value for our currency of €1 = 78.75 Irish pence. The Germans chose a value for the German Deutschmark of €1 = DM1.956.

If we take it that both Ireland and Germany chose values for their currencies that were realistic it means that Irish and German prices and costs were roughly in line in 1998. This means that we can measure the loss of competitiveness of Ireland relative to Germany by comparing the rates of inflation in each country since 1998.

Irish consumer prices rose by 38 per cent between 1998 and 2009. German consumer prices rose by 18 per cent over the same period.

A shopping basket that cost the Irish Shopper IRL£79 or €100 euro in 1998 now costs about €138. A similar shopping basket that cost DM196 or €100 in Germany in 1998 now costs €118. €138 is 17 per cent more than €118.

The cost of living in Ireland is now 17 per cent higher than in Germany. German companies have largely abandoned Ireland as a location for setting up new businesses. Germany is the largest international tourism market in the world. Germans are very price conscious and the word on the street in Germany is that Ireland is too expensive.

If we are to create jobs in Ireland by attracting business from Germany we have to bring down our prices relative to Germany. This brings us to a major problem with Germany.

Germany is now totally committed to low inflation. The German Central Bank, the Bundesbank, is almost obsessive about this. The Germans have always worried about inflation but the focus on inflation is now even greater than in the past. This means that we can be fairly certain that prices in Germany will not rise by much more than 1 per cent each year over the next five years.

The problem is how can we bring down our prices by 17 per cent compared with Germany over the next five years if German prices are rising only slowly. If German prices were likely to rise by 17 per cent over this period then all we would have to do is keep our prices steady. If that happened then we would become competitive relative to Germany and start to attract German investment and tourists again.

We can be sure that German prices will not rise by much more than 5 per cent over the next five years. If German prices rise by only 5 per cent over the next five years then we will have to cut our prices by 12 per cent to regain the competitive situation that we had in 1998 when we joined the Euro. The only way that we can cut our prices by 12 per cent is by deflation and massive deflation at that. Deflation means that there is so little demand for goods and services that prices fall. That is easy in open markets like the market for potatoes but what about the market for judges and public servants who appear to be untouchable.

If we have this deflation it will mean that all the groups with weak bargaining powers suffer while the groups with strong bargaining power do well. Taxi drivers, for example, have already seen massive fall in their standard of living as a result of excessive competition. Our senior civil servants and judges will be better off as their incomes are kept steady while the cost of living falls.

If we try to regain our competitive position within the Eurozone by significant cuts in the level of prices then we will end up destroying thousands of small firms and the jobs of tens thousands of workers.

Germany should be persuaded to boost its economy and allow its prices to rise over the next five years. This would take the pressure off Ireland and all the other countries in the Eurozone that are in trouble. If Germany does not agree we will be faced with either a continued recession over many years or a financial collapse. It looks like a choice between the fire and the frying pan.

- FELIM O'ROURKE