THE financial services sector will face major challenges from the introduction of the single currency, according to a report on Ireland in the EMU to be published tomorrow. The report, commissioned by the Minister for Finance, Mr Quinn, to look at the implications of the single currency, will warn that Irish banks face serious employment and income losses.

Overall, the report, written by the Economic and Social Research Institute, is expected to be broadly positive about the implications for Ireland of joining monetary union.

Mr Quinn is likely to use its publication to reinforce his commitment to Ireland being a founder member of monetary union and the Government's belief that this would be in the economy's best interests.

The ESRI analysis is divided broadly in two - the implications of Ireland joining EMU along with Britain and Ireland joining but Britain remaining on the sidelines. It also looks at other scenarios, including what would happen if Ireland stayed out, and at the impact on a whole range of sectors.

The report is expected to point to the advantages of widening the EU Budget, particularly if Britain stays out. This would give comfort to Irish exporters in the event of a sterling devaluation.

It studies the options for companies hedging their exchange rate exposures to guard against sterling movements and concludes that, while this can provide short term relief, it cannot guard against a substantial long term sterling devaluation.

The report is also expected to highlight the need for flexibility in areas such as wages if Ireland joins the single currency, and particularly if Britain stays out.

The conclusions on financial services are likely to attract close attention. The report looks at the impact of the single currency on commercial banks and government bond and money markets.

It is expected to point out that the commercial banks get up to 10 per cent of their income from foreign exchange dealing. A single currency would severely dent that. On top of that, the once off transition costs of switching to the euro are estimated at £100 million for Irish banks.

This is one area where Ireland is better off if Britain stays out - in this event the opportunity to trade sterling against the new single currency in Dublin will present itself.

The report will also warn that the secondary bond market - where investors buy and sell Irish Government securities - could disappear in the medium term, arguing that bond and foreign exchange markets across the EU are likely to be centralised in Frankfurt and London.

The equity market on the other hand, is likely to remain in Dublin as local knowledge and research will still be needed.

Other issues in financial services include the possible takeover of Irish building societies by larger British institutions. This is likely to be a big factor only if Britain also joins the single currency but local building society management is nonetheless concerned.

The IFSC could benefit if Britain stays out as companies may feel they need a centre in the euro area. Overall, though, the affect on over seas companies in the IFSC is likely to be neutral, the report finds.

The report will emphasise that most issues contain pros and cons. Retailers, for example, will face technological issues at the introduction of the single currency but many fears are exaggerated.

The report was edited by Mar John FitzGerald, Mr Terry Baker and Mr Patrick Honohan of the ESRI, and included contributions from a range of other economists and consultants.