Euro relationships give Quinn toughest challenges

IRELAND'S presidency of the EU coincides with some of the most important developments in the move to a single currency. The decisions taken over the next six months by Minister for Finance, Mr Quinn, and his European counterparts could prove vital to the future of Irish business and, particularly, of exporters to Britain.

Exporters to Britain employ 50,000 people and sales account for almost 40 per cent of indigenous exports. The dilemma is that if the pound becomes one of the first line of currencies to join the euro, exporters could suffer severely if sterling devalued.

As a result, finding a way either to tie Britain and other "outs" to the "ins" of the single currency or to adjust to the potential shock of a devaluation is a priority for Mr Quinn.

However, the issue is not as simple as the relationship between the "ins" and the "outs". An important distinction needs to be drawn between those who are "out" and the "pre-ins".

Most of the assumptions about the future workings of a new exchange rate mechanism, as well as the rem it of the European Central Bank, appear to assume that the "outs" are, in fact, "pre-ins" - currencies which will not join the euro at the start but will be working towards joining the currency bloc.

But, if British Prime Minister, Mr John Major, is to be believed, there is no guarantee that Britain will ever want to join the euro. If that is the case, there is no reason why it would want to subject itself to any rules imposed by an independent European Central Bank for currencies in the revived ERM.

British officials are against forcing a new ERM - which would limit fluctuations against the euro - on all the countries which remain outside the euro bloc. Even Bank of England governor, Mr Eddie George, has been vocal on the matter recently.

The debate then is how to maintain a certain degree of convergence between those inside the system and those on the outside. Mr George's argument is that this could be achieved by pursuing a tight domestic inflation target, since this would rule out large devaluations of any sort.

As welcome as a formal inflation commitment from Britain would be to the Irish authorities, and although the argument has a sound basis in conventional theory, the devaluations in 1992 prove that if economies are running below full capacity, inflation will not necessarily be fuelled by devaluation.

But even if we take the British at their word and believe that they wouldn't de-value simply to gain competitive advantage, sterling could fall rapidly simply on the back of a slide in the dollar and the associated flows into the euro. This is the problem with which Mr Quinn will have to grapple.

One way around this would be for the European budget to be dramatically enlarged. In this way it would work in a similar manner to the US federal budget, which, effectively cushions states hit be poor economic times by transferring more money through social security and other payments. A similar mechanism in Europe means Ireland could fight for larger transfers if sterling fell sharply, although how it would work is far from clear.

Mr Quinn may well use the opportunity, the presidency provides to press for such an enlargement of the budget. If he does so, other Europeans may be sympathetic. After all, Portugal could be badly affected by a peseta devaluation and Denmark by a devaluation in Scandinavian currencies, to name but a few. However, the Union's big paymasters will be very slow to undertake any major new financial commitments.

In framing his strategy, Mr Quinn will be influenced by the eagerly awaited report from the Economic and Social Research Institute on Ireland's participation in EMU, which will be published later in July. Irish exporters will hope that its recommendations ensure they are not forgotten in the rush towards a single currency.