At first sight it may appear that the European Central Bank (ECB) has turned the corner. The euro is on the rise, growth in the euro zone should exceed that of the US this year and inflation is expected to fall.

However, the ECB, now in its third year, still faces a number of significant challenges, ranging from integrating Greece, persuading the UK and Sweden to join the euro, the retirement of its president Mr Wim Duisenberg and, of course, the huge task of introducing notes and coins.

This is expected to be Mr Duisenberg's last year as president. Although his term is due to run for eight years, under a verbal agreement he has promised to retire next year, shortly after the introduction of the notes and coins and at the same time as the French vice-president Mr Christian Noyer. It had been agreed that he would be replaced by the polished French central banker Mr Jean Claude Trichet. However, Mr Trichet has had his own troubles and faces a judicial review over his handling of Credit Lyonnais, which may preclude his appointment.

It is said that several countries have already started lobbying for their candidates to succeed Mr Duisenberg, but the ECB presidency is not a job the French will give up lightly. Resolving this issue in good time and without the rancour that marked Mr Duisenberg's appointment will be a priority. The Irish Central Bank governorship vacancy arises even sooner, when current governor Mr Maurice O'Connell retires at the end of April. His successor has not yet been announced. However, some commentators point out that this is a very important position in terms of the ECB.

It is possible that the Irish governor could have a claim on the so-called small country seat on the ECB board currently occupied by Ms Sirkka Hamalaienen of Finland. She retires in May 2003 and would need to be replaced by someone with institutional and economic expertise. The current favourite is Mr Noel O'Gorman of the Department of Finance, an institution where Central Bank governors usually hail from, but some analysts have tipped the National Treasury Management Association's

Dr Michael Somers as someone who might fit into the ECB's executive board structure. Another possible candidate is UCD's Prof Brendan Walsh. The appointment could be very important as the ECB is likely to be subjected to similar pressure as the European Commission to reform its structures. Currently, all national central bank governors have an equal vote at the table. However, this is likely to alter once the eastern European states become members. It is expected that only the larger countries and the executive board will have a vote, with some rotation of the votes of the smaller national central banks.

Politicians are already beginning to act. At the recent Nice summit they agreed that the Council of Ministers should be able to amend the ECB's decision-making procedures acting on a recommendation from either the Commission or the ECB. How the rules could be changed has not been decided yet, but it seems clear that if Ireland wants to retain a vote it will need to have a representative on the executive, at least occasionally.

There is also the question of bank supervision, an issue that has been put on the long finger in Ireland. There are already moves to put this on a supranational basis. The growing volume of cross-border banking activity strengthens the argument that supervision is best done centrally - something our policy-makers will be keen to keep an eye on.

The ECB is already facing the task of integrating Greece, which joined on January 1st. Its GDP is around twice Ireland's and is less than 2 per cent of the euro zone. However, Greece has higher growth and inflation rates than many of the core countries. The ease with which it is assimilated will be a key for the future inclusion of countries such as the Czech Republic or Poland. Indeed, it makes the entry of the UK and Sweden at least slightly more probable.

The ECB will also have to contend with what could turn out to be a very different economic climate. Until now global growth has been positive, making the ECB's task a little easier. But with a slowdown in the US economy looking likely, the ECB will have a more challenging time keeping the euro zone economy on track.

Already it seems clear that its next move in interest rates will be down - for many, the only question is when. But there are some in the markets who still think that the ECB may raise interest rates just one more time. This perception underlines what could be the core problem for the ECB - its communications policy.

In many ways the ECB is more open than the US Federal Reserve or even the Bank of England. It may not publish minutes of its meetings, but Mr Duisenberg does give an on-the-record briefing every month and its monetary targets are published.

But still the issue remains that the market simply cannot read the ECB's intentions in the way it can read the Federal Reserve's intentions. Its chief economist, Mr Otmar Issing, has even admitted this. And as the Economist pointed out, the more the ECB tries to explain itself the more confusion it seems to sow.

Quite how the ECB can overcome this is not clear, but it could eventually mean a move more towards the US system where Fed chairman Mr Alan Greenspan is seen as the force behind every rate move.

But whatever is decided, the ECB is perhaps facing two years that could prove to be almost as difficult as its first two - despite falling oil prices and a rising euro, which on the surface would have appeared to sort out most of its problems.