The Central Bank governor, Mr Maurice O'Connell, is in an uncomfortable position in the run up to monetary union, according to his counterpart in the UK, Mr Eddie George.
Speaking at the Institute of European Affairs in Dublin yesterday, Mr George said that the Central Bank of Ireland had an uncomfortable task in trying to balance the needs of a growing economy with entering monetary union.
He also warned that employees will have to be told about the discipline which the single currency involves, so as they take it into account when negotiating wage agreements.
The economy would need tighter tax and spending policies to offset looser monetary policy as interest rates fall, Mr George said.
Entry to monetary union would also mean pay deals being dependent on inflation and possibly sterling movements against the euro, to make up for the inflationary dangers of lower interest rates.
"The best possible outcome is for the Government, the authorities and the people to really understand the discipline involved in a single currency and the limitations of traditional instruments and if they do understand this, then it can have an affect on wage demands. That could be the best possible solution, but it is extraordinarily hard to bring about."
He added that he would be uncomfortable in Mr O'Connell's position and said a lot of people in continental Europe were relieved when the UK exercised its optout, because of the difficulty in managing economies growing at such divergent growth rates.
He also warned that the danger for Ireland lies in the fact that we now need higher interest rates and that the affect of lower borrowing costs could be higher inflation and a loss in competitiveness.
Mr George also said monetary union was a political project and if the economics go wrong then that could reflect badly on the politics of Europe and give rise to tensions.
The positive side to monetary union, he added, is exchange rate certainty which would be "very desirable". But the essential disadvantage is the one-size fits all interest rates, which will not prove to be appropriate to the domestic needs of each of the member countries. "There is no doubt that such a risk exists."
He added that the single currency on its own will not be enough to prevent the persistence of unacceptably high levels of unemployment.
"Unless we are all more successful in bringing down structural unemployment then some countries could find it difficult to continue to live with a common macro-economic discipline, without significant tensions."
Mr George also dismissed the idea that sterling would track the euro, the new single currency. "You cannot serve God and Mammon," he said. "And the Bank of England's clearly defined objective is price stability."
Mr George insisted that an exchange rate regime for a currency could not be set, without compromising the fight against inflation. However, he added, that to allow the euro to become a divisive factor in the broader relationship between the EU member states would be "to cut off our collective nose to spite our collective face".
Mr George refused to predict where euro interest rates would rise to but said that German domestic demand would be the key.
But he hinted that interest rates could be higher than the 3.75 per cent to 4 per cent currently implied by financial markets. "How high they will go depends on how quickly domestic demand in Germany grows. Watch that space."
