The Government must establish a framework to encourage investment in research and development (R&D) and help reverse a decline in productivity that has left Europe far behind the US, Central Bank governor John Hurley said yesterday.
Speaking at a lunch hosted by the Leinster Society of Chartered Accountants, Mr Hurley said the failure of productivity levels to catch up with those in the US represented a "crucial challenge" for European policymakers.
The governor said it was clear that many goals set out in the Lisbon Agenda, which aims to turn the EU into the world's most competitive and knowledge-based economy, would be difficult to meet by 2010.
"If the Lisbon Agenda is to get back on track and the EU is to realise its full growth potential, the pace of reform has to be stepped u p at European and national levels," Mr Hurley said.
Productivity growth in the Irish manufacturing sector has slowed significantly over the past few years, from more than 14 per cent in 2002, to about 2.5 per cent last year.
Moreover, on a year on year basis, productivity growth in manufacturing was actually negative during the first half of 2005, a drop Mr Hurley called "surprising". He said the bank was looking into the drop, but said stopping the decline was essential for Ireland to remain competitive.
"Given that Ireland is one of the higher-wage economies, productivity improvements across all sectors, including services, will be essential if it is to be competitive in the global economy," he said.
An important aspect of reversing this decline was to increase expenditure on R&D, an area where Ireland lags behind some of its European counterparts. Such an increase has been proved to lead to an rise in productivity, he said. He also called on the Government to encourage multinational firms to undertake their R&D activity in the Republic rather than in their home countries.
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