Euro game means high risk stakes

So will it all work? Amid all the hype of the coming weekend, few will mention the risk of failure of the great euro project. But make no mistake, "project euro" is the most ambitious plan for many years in international economic relations. And ambitious strategies are high risk.

The euro is a project driven by politics. The motives of its founders have been well explored. The desire by Germany to deepen European integration and the wish by France to wrest economic control away from the Bundesbank have combined to push Europe towards a single currency.

The economics has followed the politics, as an economic case was built by the project's supporters to back their political goals. The decision was taken by Europe's leaders in 1988 to start the ball rolling towards a single currency. After this, they asked a European Commission led by Jacques Delors to examine the pros and cons of the move.

The result - The ECU Report - was published in 1991, giving an unsurprisingly upbeat view of the benefits of a single currency. The report skated over the downside of the single currency.

It dismisses the traditional economic theory of the "optimal currency area" which points out that for an area to have a single currency, it is helpful if it is fairly uniform in its economic structure and that labour and capital can move freely around it. Such theories are often wrong but it is foolhardy not to realise that introducing a single currency across 11 disparate member-states is bound to be risky.

We must presume Europe's financial system - the central banks and the financial institutions - have done their work and that when the buttons are pressed this weekend, the switch to the euro will be a technical success. Even if only a small part of the banking system in the euro zone is not ready, then chaos could result. If, for example, a few large euro payments being made from a German bank to an Irish bank on January 4th do not go through because of a glitch at either institution, then the consequences for the Irish bank could be quite severe. In short, it could be strapped for cash at the end of the day.

The omens look good for take-up by business. Many large multinationals are to start to use the euro for a significant part of their business from day one and over the next year or so the euro should become the main currency used for cross-border trade between euro zone members.

Businesses with large trade across European borders will quickly come to appreciate the advantages of the new currency. For many, of course, it will also mean new competition as businesses and consumers can compare prices across borders and the exchange rate risk of trading or investing in other euro zone states disappears. There will be winners and losers and Irish business is in for competitive challenges as dramatic as those faced in the years after we first joined the then European Economic Community in 1973. Price transparency - the ability to compare prices across Europe - will be one factor acting to spur competition. Another will be that interest rates will be the same for all businesses and that exchange rates will be fixed, meaning that states cannot devalue their currencies to gain competitive advantage.

This fixing of exchange rates, along with the setting of interest rates centrally, removes one of the main economic "shock absorbers" from member-states. In the past, if one part of Europe was affected by a different set of economic circumstances than the rest, then this would be partly reflected in the foreign exchange markets and in interest rates.

With currencies and interest rates fixed, member-states will still have some scope to respond by varying budget positions - although they will not be allowed to borrow too much. And unlike the US, for example, the euro zone is not one market - capital can flow fairly freely, but people do not move easily from one state to another in search of work.

So there are unanswered questions about how the euro zone will react in the face of economic turbulence - the states which do best will be those who are the most productive and, crucially, the most flexible. Those who do not have these characteristics will face higher unemployment. Clearly, it will be each state for itself, with no large central EU budget to transfer money and smooth out turbulence.

There are also political questions. The euro zone is one monetary area, but it has no single political authority. The European Central Bank, which will control our interest rates and our currency, will operate with an extraordinary degree of independence. The scope for political tensions if there is an economic downturn is obvious.

All this means the euro is not doomed to failure but success cannot be guaranteed and many difficulties lie ahead in getting used to living - and prospering - inside the euro zone.