Euro getting a bad image fast

Does it really matter if the euro keeps falling? The decline in the currency has garnered headlines day after day and the answer - as with all things economic - is yes and no.

Traditionally the main danger with a falling currency is the risk of rising inflation as the cost of imports rise. This happened here last year when the pound last fell below 82p sterling and inflation later peaked in August.

However, the euro zone as a whole is a very closed economy with few imports from outside the area. As a result, it is very unlikely that inflation will be imported to any significant extent.

As Paine Webber's executive director Ms Alison Cottrell asked earlier this week: "If there is no inflation risk in the euro zone and no direct danger of imported inflation, then does a soft currency matter? No not really."

The other side to more expensive imports is cheaper and more competitive exports. The euro's decline against the dollar and sterling makes all euro zone exports to the US, Britain and other non-euro countries increasingly competitive.

Because of this, the British manufacturing sector is lobbying hard against strong sterling.

According to Ms Cottrell: "The irony is that for all those on the UK side who have said `look, the euro is such a soft currency and we've got such a nice hard sterling'. Nice? Whose problem is this?"

The issue is very different here. The Irish economy is growing by at least 7 per cent, interest rates have fallen rapidly and adding a depreciating currency to this cocktail would normally be considered the utmost folly.

Unlike the euro zone as a whole, Ireland is exposed in terms of trade with a non euro zone state - Britain. It is likely that a pound exchange rate of below 82p sterling will lead to a rise in inflation if it is sustained, although the evidence in terms of rising prices would still be some months off.

The other argument against a sinking currency is that it simply does not look good. It may be true that the US is performing far better than the euro zone, but after all the hype surrounding the launch of the currency an almost immediate depreciation of 13 per cent simply does not make the average consumer feel confident in his new currency.

And the mixed signals from Europe's policymakers is damaging confidence in the management of the new currency and of the euro zone economies.