The Government and the business establishment believe that failure toendorse the Nice Treaty would have severe consequences for the Irisheconomy, writes Arthur Beesley

The  vote on the Nice Treaty this month will have a crucial bearing on the fate of the Irish economy.

With the domestic downturn continuing, the second referendum takes place amid fear of war against Iraq and an aimless stop-start recovery in the US. But if these issues dominate the immediate agenda for major investors in the Republic, they are unlikely to ignore the outcome of the vote.

A number of major multinationals contacted during research for this article did not want to comment publicly on a political matter such as the referendum, but they stated quietly that they favoured a Yes vote. While membership of a bigger EU was seen as a boon, some said a No vote would lead to fears for the goodwill that enabled the European Commission to endorse unofficially the Republic's 12.5 per cent corporate tax rate. Such a vote would diminish the Republic's standing in Europe, observers said, perhaps leading to deeper scrutiny of the corporate tax regime.

"If we turn down Nice I have no doubt that the long-term effects would be very negative," said the chairman of IDA Ireland, Mr John Dunne. "The development of tax breaks for the financial services sector in Dublin docks couldn't have been done without the understanding of the EU. If there is a No vote on this issue the consequence will be a loss of influence and a sympathetic hearing in Europe. Such a vote would cut us out from the mainstream of Europe."

According to the president of the American Chamber of Commerce in Ireland, Mr Bernard Collins, the comparatively low tax rate was the biggest single advantage to foreign investors in Ireland. "There is no doubt that a second rejection of Nice has the potential to marginalise Ireland within Europe and this could impact on future investment decisions being taken by US companies," he said.

This view was common among his contacts throughout US firms in the Republic, said Mr Collins. Such companies - and their EU and Japanese counterparts - are significant employers of Irish labour and they are crucial to the State's job-creating performance.

Central Statistics Office figures suggest that foreign-owned companies employ almost half of all manufacturing workers in the State - about 122,000 - and thousands more in the finance and banking sector. US firms employ 89,000 Irish people. Such jobs create a virtuous cycle, contributing to tax returns, decreasing dependence on social welfare and creating an economic stimulus in their own right.

As the economy grew, so too did the scope and size of its trading relationships. For example, some 31 per cent of Irish exports went to Britain in 1982 and 43 per cent of imports came from Britain. Only 20 per cent of a much higher export pool in 2000 went to Britain and the share of imports fell to 30 per cent.

But while the economic transformation of the past 15 years would not have taken place without the presence of such employers in the domestic scene, not all observers agree that Nice presents just a straightforward economic opportunity.

After all, the arrival of 12 new members in the single market will bring rivals for investment into the frame and many will have wage costs much lower than those in the Republic. Still, as the former Ulster Bank chairman, Sir George Quigley, told the Forum on Europe, such threats will have to be addressed in any event. Thus is "competitiveness" on the international investment market regarded as important.

Through IDA Ireland, IBEC and other lobbies, the State and the business establishment claim that failure to endorse the treaty would inflict severe damage on the Republic's economy with opportunities missed as the single market grew by up to 500 million people. Not only might foreign investors choose against the Republic, but Irish firms might lose out on investment options.

"Most foreign direct investment in the candidate countries is from the current member-states, at around 0.15 per cent of EU gross domestic product," according to an Institute of European Affairs paper. "Outward direct investment from Ireland will increase. It will be necessary for Ireland to position its indigenous sector to become actively involved in the new European foreign direct investment market."

Yet with Ireland set to become a net contributor to the EU budget, No campaigners tend to emphasise what they say will be the "enormous" cost of repairing the backward economies of eastern Europe.

In addition, they question the perception that EU membership has been a boon to the domestic economy. A paper by Dr Anthony Coughlan of the National Platform attributes the 1990s boom to the low value of the punt and, later, the euro. This was the principal factor, he said in a submission to the Forum on Europe. "During the 1980s, a decade after it joined the then EEC, the Republic of Ireland suffered the emigration of one-sixth of its labour force and the simultaneous unemployment of another sixth at home," he said.

No doubt the Irish economy was a laggard in the 1980s. But a key element in the 1990s expansion was the ability to capture investment from booming firms in the US and Europe. Irish operations received more than €62 billion in inward investment in 1998-2001. According to IDA Ireland, the State received 10 per cent of all foreign investment into the EU from outside the EU in 2000, while accounting for only 1 per cent of the union's population.

Three major US corporates with thousands of Irish workers said EU membership was an important factor in their decision to invest in the Republic. The view is backed by Forfás, which says inward investment was driven by the single market.

Membership means the State can be seen as a trade nexus between the US and Europe. There are other factors too, not least the high standard of education and the availability of workers fluent in English.

But with wages on the rise, infrastructure heaving and inflation higher than anywhere else in the EU, the cost of business in the Republic is heading only upwards. It is in this context that advocates of the treaty say the price of a No vote has the potential to be very high, creating serious disadvantages down the line because the EU will expand even if Nice is rejected.