If all goes according to plan, the only significant decision that is left to be made on European Monetary Union is the rate at which the Irish pound enters. Of course a lot can happen in the world between now and May 1st when the participants and the entry rates will be decided. But it would take a very severe world-scale "event" to derail monetary union at this late stage.
On the first weekend in May, it will be decided which EU states enter monetary union and at what exchange rates their currencies will enter. These decisions have now become near formalities, barring some major new political or economic development.
The value of the pound is the one exception. Until this week, financial markets had expected that it would be revalued within the ERM. Now that belief is waning daily and with it the value of the punt in your pocket.
Eleven member-states will start EMU (including Italy, Spain and Portugal) and the entry rates will be based on the central rates of the ERM. All the prospective participating currencies have been exceptionally close to their central bilateral rates for some time with the exception of the pound.
Brendan Lynch is an economic consultant and was economic adviser to Mr Ruairi Quinn when he was Minister for Finance.
For most of last year it was 810 per cent above the rest. Last Friday, it was still 6 per cent above the rest. But at the time of writing, it had fallen below DM2.50. If it is not revalued before May 1st, it will fall to at least DM2.45. If sterling stays high, this would mean 82p sterling. Relatively high Irish interest rates will probably stop the pound falling all the way to DM2.42 until the summer.
In the last year, the Minister for Finance waited to see whether sterling would fall in value to the dollar and DM. Unfortunately for Ireland, it didn't and the Minister has clearly run out of time. The pound will continue to fall to DM2.45 without a clear signal that the Minister will revalue.
These recent falls in the pound, if not reversed by a revaluation, will lead to higher inflation in Ireland, compared to mainland Europe, particularly if sterling stays high. There will probably be some small upward rise in Irish inflation but this could be limited to no more than a temporary peak of 3 per cent or 3.5 per cent because of global and European deflationary trends. Even before the Asian financial crisis, very strong deflationary trends have been keeping down inflation in all European countries, including Ireland, and confounding many forecasters into the bargain.
With the domestic background of unprecedented high economic growth rates and rampant asset price inflation, the last thing the Irish economy needs is any inflationary fall in the exchange rate. A small revaluation would have seemed better than nothing to forestall some of that fall.
But our problem in Ireland is that we don't know what will happen to sterling in the short or medium term once we are in EMU. The problem is compounded by our experience, which is that sterling's regular sharp falls in value relative to the DM are what cause us our greatest trading problems. The lower that the pound is permanently fixed to the DM and the euro, the less this would cause us a problem in the short to medium term.
We cannot reasonably expect that sterling will gradually slide downwards in a manageable way to DM2.60 or its equivalent in euros. No currency ever moves like this and especially not sterling. There is a rough consensus estimate by British economists that sterling's equilibrium value is around DM2.55DM2.60. Based on this analysis, we could comfortably revalue by 5 per cent to 8 per cent if it wasn't for the spectre of sterling volatility. But what happens if sterling starts falling in the next year and falls all the way to its previous low point of DM2.17 sometime in 1999 or 2000?
The pound would be worth £1.15-£1.20 sterling with no prospect whatsoever of devaluation. If we don't revalue, the pound would still rise to £1.11 sterling; bad, but a lot better than £1.20.
Whether the Minister revalues the pound or not, the Government will have to make policy provision for both outcomes. On inflation, one hopes that our well-led social partners can reach agreement in the private sector on the distribution of the gains and losses from an effective devaluation and accompanying higher inflation. The Government ought to minimise Government-led inflation, whether excise taxes or Government-inspired increases in prices and charges, like electricity prices or the TV licence.
The spiralling cost of public sector pay is the biggest problem for the economy's cost competitiveness in the medium term.
There is relatively little that the Government can do to alleviate the problems that a precipitous fall in sterling causes to parts of the industrial and tourist sectors as well as to the Border area. This region's GDP per capita is 20 per cent lower than the national average.
The revaluation decision is about balancing desirable outcomes, worst case scenarios and possible policy responses. In the last few months, a small revaluation (5 per cent or less) appeared the best compromise given the apparently uncontrollable growth of the Irish economy. But now with recognition from the highest level (US Fed chairman, Alan Greenspan) of the real possibility of global deflation, the pendulum has swung towards no revaluation despite sterling's continued strength.
Brendan Lynch is an economic consultant and was economic adviser to Mr Ruairi Quinn when he was Minister for Finance.
