Now that Irish interest rates are set by the European Central Bank (ECB) to reflect conditions in the euro zone as a whole, the performance of Europe's bigger economies is more relevant to the Irish economy than ever before.

Germany, which accounts for half of the total industrial production in the euro zone, has performed poorly in recent years, with growth slowing to 1.25 per cent in the middle of the 1990s.

The ESRI report predicts that Germany's present recovery will gain pace, producing an average growth rate of 2.3 per cent between 2000 and 2005, rising to 2.6 per cent for the subsequent five-year period.

But figures released in Germany recently suggest that the upturn may be more robust than many economists have recognised until now, with manufacturing orders surging by 5.1 per cent during August. Most observers expected orders to rise by just 0.5 per cent but a demand for western German exports sent figures soaring.

The Finance Minister, Mr Hans Eichel, seized on the figures as evidence that the German economy has finally turned the corner and predicted that the economy would grow by 2.5 per cent next year.

Unfortunately, as the ESRI report points out, Germany's economic recovery has yet to have a significant impact on the country's lengthy dole queues and, although the number of unemployed fell below four million last month, more than 10 per cent of the workforce is still without a job. The report predicts that sustained economic growth will gradually reduce German unemployment but it expects the jobless rate to average 9.9 per cent between 2000 and 2005, falling to 8.7 per cent during the subsequent five-year period.

This view is shared by the Bundesbank, where the prevailing view is that four-fifths of German unemployment is structural and cannot be eliminated by moderate economic growth.

"I'm afraid we will have to live with high levels of unemployment for a long time," a senior Bundesbank executive said.

Such a bleak scenario is unlikely to be acceptable to Chancellor Gerhard Schroder's centre-left government, which came into office promising to reduce unemployment substantially. Mr Schroder's Alliance for Jobs, which brings together the social partners and the government in an attempt to create jobs, has so far borne little fruit.

But, as the economic recovery gathers pace and the Chancellor's political position becomes more secure, the ESRI's gloomy prediction about German unemployment could well be proven wrong.

The recovery in Germany - and in the other Continental EU economies - will help to support Ireland's export performance and sustain economic growth. It will gradually bring higher interest rates, as the European Central Bank pushes up borrowing costs in response to the recovery in the core eurozone economies.

Higher interest rates will bring an appreciating euro against sterling and the US dollar, and as a constituent of the euro the pound's value will rise too. Between 1999 and 2005 the pound is forecast to appreciate by nearly 6 per cent against the dollar and sterling and by some 4.5 per cent against sterling by 2003, the date at which the ESRI assumes the British currency will join the euro club.