The Tánaiste has acknowledged that Ireland's persistently high inflation is damaging the economy's competitiveness. But she defended increases in indirect taxes introduced in the Budget, saying they fell far short of what some Cabinet colleagues wanted.
"The Government's efforts contributed less than 1 per cent to inflation. We made policy decisions on tobacco and alcohol that were driven by public health considerations but some of the other increases were designed to increase revenue," she said.
Ms Harney was speaking in Davos, where she is attending the World Economic Forum, an annual gathering of politicians, business leaders and opinion formers.
The Forum will hold a European Competitiveness Summit in Dublin in October, looking at ways of making the European economy more competitive.
Ms Harney acknowledged that, although Ireland's educated workforce and low tax rates were valuable competitive tools, the Government had much to do to tackle infrastructural weakness.
Describing Ireland's 5 per cent inflation rate as "definitely too high", she warned it could drive business away. "Inflation has the capacity to undermine our competitiveness. The appreciation of the euro could also cause problems for some companies," she said.
October's summit in Dublin comes just three months before Ireland assumes the EU Presidency and the Tánaiste said competitiveness would be a strong theme of the Government's six months at the EU's helm. She said Europe must become more competitive because, unless the EU was successful at creating jobs, European citizens would turn against the project. She expressed disappointment at the lack of progress towards achieving the goal the EU set itself in Lisbon - to become the most dynamic, knowledge-based economy in the world by 2010.
"We've signed up to the rhetoric but not for the policies," she said.
Ms Harney said Ireland's low corporate tax rates were good for Europe as a whole because they attracted the EU firms that might otherwise move to Asia or South America.
"The rest of Europe should follow the Irish example. Ireland competes with the world, not just Europe," she said.
Former EU Commissioner Mr Peter Sutherland told a session on competitiveness that Europe was failing to fulfil its Lisbon agenda because vested interests were impeding competition throughout a range of sectors. He added that tax competition between member-states was good for EU competitiveness and dismissed the argument that divergent corporate tax rates distorted the internal market.
"The fact is there is tax competition between the states of the US. It is in no way inconsistent with the proper running of the internal market," he said.
Ms Harney said that, instead of talking about harmonising taxes, the EU should complete the internal market and leave the tools that were not necessary for that in the hands of the member-states.
She welcomed the debate underway at the Convention on the Future of Europe but said she favoured "a period of reflection" between the end of the convention and the start of an Inter-Governmental Conference to determine the final shape of Europe's constitutional treaty.
Despite her notorious remark about Ireland being spiritually closer to Boston than Berlin, Ms Harney insisted she was not "more American than European".
She said it was possible to be pro-European without agreeing with all the proposals of the bigger member-states, many of which she believes to be out of touch with the wishes of Europe's citizens.
