Euro D-Day as Ireland signs up with elite 11

This weekend Ireland will take its place among the group of countries to join the single currency in seven months' time. We will be formally signing away our right to a national currency and control over monetary policy to become part of a far larger supranational EU monetary area.

There has been some debate over the advantages and disadvantages of joining the euro, but it failed to really ignite. From early on, it has been clear that, whoever was in government, Ireland would aim to be amongst the founder members of the single currency,

There are risks, of course. Some economists believe that a prolonged burst of sterling weakness could place severe competitive pressures on Irish firms and jobs, as devaluation of the pound will no longer be an option.

Other critics have pointed to the dangers of inflationary pressures building up in the economy because in the months ahead interest rates here will fall to central EU levels, effectively imposing interest rates suitable for a modest growth area on a booming economy.

If inflation here does take off, then the impact will be directly on competitiveness.

Nevertheless, the supporters of the single currency argue that the benefits of the project both political and economic will outweigh the disadvantages. Ireland will be part of a giant "euro-market" offering stable exchange rates against its euro partners and, if it all works, a regime of low interest rates and, in the long term, moderate inflation.

In any case, this argument is now over and the debate has moved towards how Ireland should prepare for monetary union and how its policies should change once it is in.

The new single-currency zone will take in 11 countries as diverse as Germany, Ireland, Finland and Italy. It will include 300 million potential consumers and will be the second largest economy globally. This is bound to unleash competitive forces not even thought about by many Irish firms until very recently.

Mr Niall FitzGerald, chairman of Unilever, the Anglo-Dutch consumer giant, has warned recently that monetary union will deliver a "juddering competitive shock" to the European economy.

Consumers and firms will be able to compare easily prices across borders, as everything becomes priced in euros. Larger or fast moving companies will be able quickly to move into markets while more slow footed competitors may be left behind. Smaller companies will also benefit as many previously lacked the resources to engage in significant foreign exchange management. And a new wave of mergers and rationalisation will sweep the financial sector as a single euro capital market is born.

For Irish policymakers, it will not so much be a change of rules more as a whole new ballgame. Interest rates will have to fall significantly here over the rest of the year.

While the timing of these changes is still in doubt and many believe that the Central Bank will now leave any cuts until as late as possible it is possible that rates will fall by almost 3 percentage points between now and December.

However, if the Germans raise rates over the end of this year as their economy recovers the fall may only amount to around 2 percentage points. Even so, not the appropriate medicine for an already-booming economy with a soaring housing market. The framing of the 1999 budget will also be affected. The Minister for Finance, Mr McCreevy, has pledged to the EU that price stability or keeping inflation under control will be at the heart of the package. This would mean less tax cuts and a far tighter rein on spending than many, particularly in the trade unions, had been anticipating.

However, the ESRI has already warned that a miserly budget may not be in the best interests of the economy, as controlling wage inflation is probably the key to continuing economic prosperity. Reneging on tax cut promises may spell the end of national wage agreements, the institute warns. On top of that, the package of measures to cool the housing market unveiled last week will probably go some way to calming nerves both at the Central Bank and Department of Finance, and as a result, a limited amount of both tax cuts and spending increases can still be expected. But control of Ireland's main macro-economic fundamentals has already moved to Brussels. The communique following the recent revaluation which said that any excess revenue from tax buoyancy this year would go towards cutting debt was probably only the first sign of the interest our European partners will take in the Irish economy.

In the longer term, the single currency will create pressure for political and economic change. For example, there is likely to be significant pressure for tax harmonisation, where many of the main categories of tax across the participating countries in the single currency will converge.

Mr Daniel Bouton, chairman of Societe Generale, has argued that it will not be more than five years before consumer pressure leads to tax harmonisation. This could put continued pressure on indirect taxes to fall here and may also lead to further downward pressure on income tax levels.

On top of that, all EU governments are being set targets to reduce the overall tax burden on the unskilled and the low paid. Importantly, there is a provision that this must not jeopardise the recovery of public finances. This problem is unlikely from the Irish viewpoint and it appears that there is no clause which gives a let out in terms of the danger of tax reductions fuelling inflation.

The other main challenge facing monetary union is its impact on labour markets. There are fears that unless serious progress is made, the level of social unrest could grow and the single currency project could be blamed for persistent high unemployment. In Ireland, unemployment has been falling, but any slowdown here could mean rising joblessness again becomes an issue.

This could pose a problem for Irish policymakers if the interest rate level or budgetary policy being imposed on us further depressed the economy when growth was slow in effect, the opposite problem to that faced in the months ahead, when the policy being set from the centre is too expansionary.

The Treaty of Amsterdam has set out for the first time the promotion of employment as a "matter of common concern". The employment chapter promises more concerted action to tackle the problem over the coming years, which would take the heat off the new European Central Bank. Many feel the ECB could end up being a convenient whipping boy for much of the European public.