A completely different economic landscape is now only a matter of days away. Monetary union will be born on January 1st and the most radical economic change in Europe this century will begin. Exactly how the world and, of course, Europe will look next year and even the year after is far from clear.

With more than 260 million citizens, the €11 states will make up the biggest economic area in the developed world, bigger even than the US.

But there are outstanding questions as to what sort of a world that will be. Monetary union is only the beginning of an even bigger project - political union. And, of course, one of the necessary transitions to this is the co-ordination of taxes - if not rates then at least regimes.

Against this background, it is clear that the Stability Pact, negotiated in Dublin, is not really the best approach to fiscal policy. It was designed to stop governments spending too much money by borrowing to excess and increasing their deficits. The pact was insisted upon by then German finance minister, Theo Waigel, who needed it to keep elements of his constituency happy, particularly as it became clear that Italy would indeed be joining the single currency. But the Stability Pact has the potential to cause as many problems as it solves. Individually, the €11 states will not be able to use monetary policy to tune their economies and keep them from going from boom to bust. Thus, all over Europe fiscal - or tax-and-spending - policy is assuming an ever greater role and coming under a greater focus than ever before.

The Economist magazine has argued that a rule calling for budgets to be balanced over the medium term would make far better sense than the Stability Pact. It would permit bigger deficits during downturns and require correspondingly bigger surpluses during upturns.

Such a rule could mean that our own Minister for Finance, Mr McCreevy, would have had to target a far larger surplus in 1998 and possibly even in 1999. But it would also allow a country going into recession to borrow to attempt a soft landing.

There are legitimate fears that many European countries, which are already sailing very close to the 3 per cent deficit limit, will be flung back into recession in the event of even a small downturn.

But even changes of this size pale into insignificance when it comes to talk of harmonisation or co-operation on tax policy.

There are already many similarities - with customs taxes harmonised, the abolition of duty free on the table and a 15 per cent minimum on VAT, subject to certain exceptions. But three big taxes will cause the most difficulties: savings, corporation and income.

Ireland at the moment is running a very different model to much of the centre-left governments across Europe. Taxes on capital and businesses are low and taxes on labour are high, albeit falling. At the same time infrastructural spending is very low by European standards even though much of our infrastructure is in far worse shape.

But the French and German high tax and high spending model is not without its pitfalls, principally high rates of unemployment. Unemployment here has been falling, helped along the way by low levels of corporation tax. So the best way forward is probably somewhere in the middle. And low tax regimes, provided they deliver enough for adequate infrastructural and other spending, are probably the most labour-friendly way to go.

But this is not the view of German Finance Minister, Mr Oskar Lafontaine, nor his French counterpart, Mr Dominique Strauss Kahn. They are determined to build on the findings of the working group on harmful tax competition, chaired by British Treasury minister, Ms Dawn Primarola.

This working group looked at issues such as incentives to locate world headquarters in a country to attract particular industries to certain areas. But the French and German ministers believe it should go one step further and that is to examine low overall corporate tax rates and not just specific incentives.

Ireland is firmly in their sights in this regard as is Britain, to a lesser extent. Average EU corporate t axes are around 40 per cent, with the British at 31 per cent. By comparison Ireland's 28 per cent looks low, never mind the 12.5 per cent which is just around the corner here. But as Mr Peter Sutherland points out, German subsidies to industry are the highest in the EU.

Other co-ordination measures such as withholding tax on euro bonds are not nearly so sensitive for Ireland but are vital for Britain and London in particular which is worried that much of its lucrative euro-bond business could disappear overseas if taxed. We already tax interest on savings at a minimum of 20 per cent.

The most sensitive of all the issues is income tax and even Mr Lafontaine may not be keen on that one.

Both the British chancellor, Mr Gordon Brown, and Mr McCreevy argue that if it comes down to the wire they will use their veto. But the use of that facility may be under threat and the possible end to the national veto over tax questions may be raised at the new treaty negotiations next year.

Other commentators point out the European Court of Justice recently ruled the taxation of life assurance was illegal because it discriminated against companies from other EU countries. That principle, where the court is the ultimate decision maker when it comes to tax matters, would make the veto practically useless.

The importance of good relations with Europe and, significantly, the other finance ministers or Ecofin has not been so vital in recent years. It has to be hoped that Irish ministers appreciate this and do not use up vital bargaining power arguing for too many slices of the pie.