Politicians basked in the glory of having achieved what appeared impossible to many five years earlier, and most commentators all over Europe were upbeat about prospects for the new currency.

There was a pretty solid consensus that the fledging currency would gradually appreciate from its launch level against the dollar. This consensus was based on longer-term structural factors. These included the vastly contrasting balance of payments situations in Europe and the United States, and the likelihood that the global central bank system would seek to build up the proportion of reserves held in the euro at the expense of the dollar.

Furthermore, there was a general air of euphoria surrounding the new currency which many believed would keep it well supported.

Many of those of us who were deeply sceptical of EMU in the run-up to its launch were sucked in by the air of euphoria. In the event, these prognostications proved well wide of the mark.

After an early rise, the euro gradually but consistently headed southwards and the only real question in the minds of analysts during the year was how far it would fall.

In the early days of January, the euro climbed to just over 1.19 against the dollar, but by the end of the month it was almost six cents lower and apart from brief recoveries in July and October, it consistently moved downwards throughout the year.

For some, the dismal performance of the currency is taken as a firm indication that EMU is a failure. Such a conclusion misses the point completely.

The answer to that question will be judged in five years time or so by the employment and growth performance of the region. In other words, the jury is still out on the success or otherwise of the euro. In explaining its dismal performance in its first year, malign and benign factors can be identified.

On the benign side, the euro simply did what any good currency should do, it moved downwards to reflect differing economic circumstances in the euro zone and the US. On the malign side, one can identify a central bank, which lacked credibility and generally performed poorly, and of course the EU's political institutions did not cover themselves with glory.

Almost from the off, news on the euro zone economy started to deteriorate. On January 5th, the influential DIW economic institute in Germany cut its 1999 growth forecast for Germany to 1.4 per cent from 2.1 per cent previously, citing global economic weakness as the reason.

Italy suffered a similar fate and it became increasingly apparent that the two countries that account for 50 per cent of euro-zone GDP were suffering disproportionately from the collapse of the Asian economies the previous year.

German business confidence as measured by the IFO survey collapsed in the early months of the year, helped in no small way by the anti-business tax proposals of the German finance minister. In response to the growing economic crisis, the European Central Bank implemented an emergency interest rate cut of 0.5 per cent on April 8th, taking the official rate down to 2.5 per cent.

In contrast to the poor economic background in the euro zone, the US economy was showing no signs of slowing and the release of Q4 GDP at the end of January showed growth at a phenomenal 5.6 per cent.

The Federal Reserve eventually moved to a tightening interest rate bias at the May FOMC meeting and duly delivered three rate increases of 0.25 per cent in June, August and November. This trend of contrasting economic performance was very pronounced for the first half of the year, but the euro got a temporary reprieve in July when German business confidence unexpectedly took a sharp jump. It then traded sideways until October, at which stage it spiked up over 1.09 as speculation mounted about an imminent ECB rate increase.

The ECB duly delivered an aggressive 0.5 per cent increase on November 4th. But this move was taken negatively by US investors particularly, who failed to understand the logic of such a rate move in an environment of 10 per cent unemployment, subdued inflation and below trend growth. The euro then began a slide that took it down through parity against the dollar on December 2nd. Against such an economic background, it was appropriate that the euro should weaken and this weakness is now the very reason why growth prospects for the euro zone are looking brighter as we move into 2000. On a more negative note, however, several malign factors were also at play.

Oskar Lafontaines's antics until his resignation in March dealt a serious blow to the German Chancellor, Mr Gerhard Schroder, and contributed heavily to the loss of the upper house of the German parliament for the SPD. The German restructuring story was blown badly off course as a consequence and the chancellor's intervention in relation to the collapse of Holzmann and the attempted Vodafone takeover of Mannesmann sent out all of the wrong signals.

The forced resignation of the entire EU Commission in March did not help the euro either. In terms of credibility, the markets were quite unimpressed with the performance of the ECB and it has become clear that the ECB is not the Bundesbank and that Wim Duisenberg was not Alan Greenspan. The members of the ECB council rarely presented a united front and displayed old-fashioned European fears of economic growth.

In addition, Mr Duisenberg appeared less than comfortable with the prospect of making the first independent monetary policy decisions of his career.

In overall terms, the euro had a difficult first year, as did currency forecasters in general. EMU was always going to be a leap into the unknown and the ECB certainly struggled to set a single interest rate to suit 11 very different economies.

IRELAND was one victim of inappropriately low interest rates, as illustrated by spiralling house prices, a very tight labour market and significant inflationary pressures. In Britain, sentiment towards EMU took a serious battering and sterling appreciated strongly as a consequence. The British authorities are clearly delighted with the decision to opt out and are likely to maintain that stance for the foreseeable future. British entry to the single currency would help EMU's credibility, but that appears a long way off.

It now remains to be seen if the currency and the ECB manage to establish their credibility in 2000. It will not prove an easy task and, meanwhile, savers in countries like Germany and the Netherlands will continue to feel distinctly uncomfortable.

Jim Power is chief economist at Bank of Ireland Treasury