With less than a week to go to the crucial series of meetings that will finally determine which countries join the EMU starting line-up and at what rates they will lock in against each other on January 1st next year, the financial markets are in a state of extreme calm.

This is not too surprising as all of the donkey work has been carried out over the past year and next weekend's events are a mere formality.

There appears to be very little scope for anything meaningful to go wrong. The only area of real contention at this stage concerns who will take over the reins of the European Central Bank (ECB) and it is unlikely that this issue will be resolved next weekend, although one can never rule out the sort of early compromise which typifies all EMU related disagreements.

Financial market behaviour has however been quite interesting in recent weeks. Sterling and the dollar were looking quite rampant against the beleaguered deutschmark just a month ago and many observers of financial markets were betting on both currencies making further significant progress and in fact it was difficult to identify very many reasons to buy the German currency.

However, there has been quite a change of attitude over the past month and the German unit is now coming back into favour in a manner which would have appeared inconceivable at the turn of the year.

It is now looking increasingly possible that we may have already seen the peak of the dollar and sterling for this year, unless we experience another crisis of confidence in the deutschmark or the euro before the year is out. This does not appear terribly likely at the moment.

The change of attitude towards the German currency has not got a lot to do with any fundamental reassessment of German economic prospects or indeed the Bundesbank's interest rate intentions.

It has much more to do with the markets looking ahead to 1999 and reaching conclusions on the sort of economic environment which will face the ECB in the early months of its life.

Based on a simple weighted average, growth in gross domestic product (GDP) in the EMU 11 in 1997 was around 2.5 per cent and based on the OECD`s recent economic forecasts, GDP growth in 1998 is likely to be close enough to 3 per cent, with a further improvement in prospect for 1999.

Such a growth performance is not and will not be driven by Germany and France, although both economies will be looking healthier as we progress into next year.

Rather growth will be driven by countries such as Ireland, Finland, the Netherlands, Spain and Portugal which together account for around 35 per cent of the EMU 11 economy. From the point of view of the ECB, which will probably have an inflation target of 0 to 2 per cent, it will have to take overall activity into account and will not just be concerned with France and Germany.

The markets have been rife in recent days with speculation about an imminent Bundesbank rate increase. Such an increase would appear to have little domestic rationale at this point in time.

The Bundesbank's last monthly report suggested some grounds for optimism that there are signs of labour market stabilisation. However, it was quite downbeat about economic activity in general and is justifiably relaxed about inflation indicators, notwithstanding the subsequent spike in money supply growth.

One certainly would not get the impression from most recent Bundesbank comments that it is an institution that is on the verge of hiking rates, although the odds still favour some limited tightening before the year is out.

In France, concerns about the economic impact of Asia are growing and here also it is difficult to detect a desire for higher rates.

However, the markets are correctly focusing in on growth prospects for the overall EMU zone and the component currencies for the euro are benefiting as a result. It is still difficult to envisage euro wholesale rates much above 4 per cent by year end, but it is not too difficult to envisage a situation where the ECB could hike rates by up to one per cent in its first year of existence.

Contrast this with the UK, where rates are expected to be falling during 1999, and the US where the rate outlook would appear to be quite stable and unexciting.

In fact growth in the EMU area is likely to be higher than in the US and UK in 1999 and as a consequence we are likely to be gone past the point of maximum bearishness for the German unit.

Of course there is still potential for some EMU jitters over the remainder of this year, particularly if the French win the battle over the ECB presidency, but such jitters are unlikely to be very significant. Here in Ireland, the only unresolved issue concerns the pace at which the Central Bank sanctions interest rate cuts.

With the Italians moving last week, Irish rates are now starting to look a little conspicuous, so perhaps the improved performance of the Irish pound against sterling and Government efforts to take the heat out of the bubbling real estate market may result in a more relaxed attitude in Dame Street.

Difficult to second guess this one but 4 per cent is still the year-end target despite the up-tick in market rates in recent weeks. Mr Jim Power is chief economist at Bank of Ireland Group Treasury. The views expressed here are personal.