In 2006, the current account stood at -4.2% of GDP in Ireland, against -9.9% of GDP in Portugal. What has happened? Quite simply, cost competitiveness is not the only determinant of competitiveness. Shifting production to higher value-added sectors is as important as keeping unit labour costs under control, if not more.
There is evidence that Ireland and Portugal have been competing in quite different products and markets in the past decade, with the latter country being subject to stronger competitive pressures from new Member States and emerging market economies. To a large extent, the divergence can be traced back to the key structural features of the two economies.