THE euro's fall against the dollar may be welcomed by many Continental politicians but is likely to receive a far cooler response from the authorities here.
Contrary to its perceived needs, falling interest rates have already given the Irish economy significant stimulation
and another monetary stimulus from a devaluing currency is not what the Central Bank or Department of Finance would want. There is a fear the weak euro will feed through to higher prices and could contribute to parts of the economy overheating. It will, of course, also make holidays outside the euro zone more expensive, particularly for those going to the US or Britain.
The problem for the Republic - and one which many other European economies do not have to worry about - is that the economy is very open to both exports and imports. As spending booms, higher import prices are more likely to find their way into the shops. And 80 per cent of our imports come from outside the euro zone, making it far more likely that at least some retailers will eventually pass on price increases.
Recent experience may indicate what is ahead: the last time the pound fell in value in 1997, there was a spike in inflation which peaked at 3.2 per cent last August - although the average for the year was only 1.5 per cent.
There are genuine fears that this could happen again. But this time around there are a couple of things going on which could alleviate any problems. The British have unveiled a National Changeover Plan bringing the date of joining the euro that much closer - at least in the eyes of the markets.
The day after the announcement sterling slipped to its lowest level against the dollar in over a year. The problem is that while the British authorities remain tight-lipped about their preferred entry level, it is clear they will want to go in as close to the Irish entry level as possible to boost the competitiveness of British industry. Ms Alison Cottrell, chief international economist at Paine Webber, points out that the floor has already been effectively set by us. This also puts an effective cap on the value of sterling and it may depreciate by as much as 12 per cent over the next couple of years, bringing it down to a joining level of around 76p. Indeed it may be that in 2002 we will be arguing against a British government determined to go in at a rate lower than our own 78.7564p.
There is also the fact that there is so little inflation across the globe at the moment that there is little inflation for us to import. The US economy has been growing rapidly without any sign of inflation for some time. Last year it averaged growth of 4 per cent, while inflation stood at just 1.6 per cent.
The main reasons for this are the large deflationary forces at work across the world. Oil prices are still remarkable low and other commodity prices have been falling for months now. Japan is already in the grip of deflation, where prices keep falling and the risk must be that if the German or French economies were to lurch downwards then the phenomenon could creep in here. But the problem is that nobody really knows how the Irish economy will react in this post-EMU environment. We are now firmly wed to the economies of Germany and France and not to Britain or the US.
Certainly, the weakening currency will be good news for European and Irish exporters who sell to countries outside the euro zone like the US or Britain. But this will only last as long as those economies keep growing. Britain already appears to be heading towards a recession, although there are questions about how deep it will be. Likewise, the US can only go on acting as consumer of last resort for a limited time.
Importers are in bigger trouble, particularly those who source from outside the euro zone and many businesses have been caught out because of the widespread belief that sterling would weaken against the euro in the first months of its existence.
Generally, if an economy is booming its currency strengthens and, in the process, reduces some of the heat - that is what is happening to the US now. But given the absence of that relief valve here as the euro remains weak, the over stimulus of the economy is likely to be something which the Irish authorities will want to see reversed as soon as possible, even given the mitigating circumstances.
