Tony Blair is hailing monetary union as a "turning point" for Europe. The single currency will, he says, help generate stability and growth and protect Europe from the economic shockwaves caused by the Asian financial crisis.

And indeed Europe's economies are now all growing. But the problem for the new European Central Bank is that they are growing at very different rates. Germany and France are no longer in recession, but growth is slow compared to peripheral countries such as Ireland and Spain, which are booming.

The overall outlook for the new euro zone is favourable. There has been little impact yet on growth from the Asian crisis, even in France which has the heaviest dependence on trade with the area.

On top of that, the difficulties caused by trying to meet the criteria for the single currency have eased. Budget deficits are now trimmed and tight budgets will not be as common across Europe this year as last.

But the problem is that there are two different economies in Europe: one is the core including Germany, Austria, France, Luxembourg, Belgium and the Netherlands. The other, the periphery, includes: Spain, Portugal, Italy, Ireland and Finland. Both "economies" are growing at different rates and are at a completely different stage of the economic cycle. Even inflation rates are diverging more in recent months. In fact, if May's figures were to be used, Ireland, along with the Netherlands and Portugal, may have failed to meet the inflation criteria for entry to the single currency.

True, the differences are less than they would have been just a few years ago. At least none of the countries is now in recession with the economies of most growing at just over 2 per cent, while inflation is low. However, the problem of huge structural unemployment remains.

But the European Central Bank will be faced with having to find a common monetary policy which is right for both Finland and Belgium. The interest-rate policy will have to strike a balance that stops Spain and Ireland from overheating while not being so tight that it risks pushing Germany back into recession.

The core countries are growing at just more than 2 per cent. Last year, budgets were tightened and short-term interest rates raised to ensure the countries met the Maastricht criteria. These policies may feed into even lower growth this year and some would argue in favour of monetary loosening or even interest-rate cuts.

But others are more optimistic. French finance minister, Mr Dominique Strauss-Khan, says he has not seen so many positive factors for growth coming together for 30 years. He is confident that the economy will expand by 3 per cent this year and perhaps a little more. This could mean the core countries could withstand slightly higher interest rates than otherwise.

The periphery on the other hand is growing so fast there are fears that parts may overheat. Most are suffering from similar problems. House prices are soaring not only here but in Helsinki. Dutch firms as well as our own are having difficulty recruiting and the Spanish and Italian stock markets are soaring.

Ireland may be most at risk from overheating. But the Economist pointed out recently that there is also expanding consumer demand in all the peripheral countries. We are not alone in having credit growth running at more than 20 per cent similar figures are emerging from Spain and Holland.

It is claimed by some that hot money is pouring in to some peripheral markets from around the EU as currency risk is eliminated. Net inflows into Italian mutual funds reached $25.2 billion (£18 billion) in April and with this amount of money in the system, workers are demanding higher wages.

And inflation is now beginning to pick up in many of the peripheral members. In Ireland prices rose by 2.7 per cent between May 1997 and May 1998, the highest rate of increase in three years.

Convergence of economic performance in the run up to monetary union was supposed to mean that similar conditions would apply to all countries which would also be at the same point in the economic cycle. It is true that long-term interest rates and budget deficits have converged, but there are still big differences in short-term rates.

The Central Bank here (and it must be assumed in many other EU countries) would like to raise interest rates, but faced with having to run a common European monetary policy from next year, cannot.

And over the rest of the year, interest rates must fall towards German levels. This means a fall of around three percentage points for Irish rates and between half and 1.25 points in Spain, Portugal and Italy.

It is unlikely that rates will rise quickly next year. Even if the ECB sets rates at around the EU average, rather than opting for low German levels, we will still see large falls in Irish rates. But even that is not certain many Bundesbank officials have been calling for rates to reflect the needs of the larger countries of France and Germany, meaning even bigger falls for the peripheral members.

As a result, all the peripheral governments will have to use different measures to try and cool their economies. Fiscal, or tax and spending policies, are options. However, there is some debate over the effectiveness of this approach, particularly in Ireland, which has a very small, open economy.

There is also a question mark over how much further the other countries can tighten policy. Most governments have slashed their deficits. Ireland and Finland are already running budget surpluses. On top of that Spain like Ireland has a commitment to reduce taxes in the 1999 Budget.

The other area which may receive more attention here is immigration policy. It is possible that adopting an Australian-style points system for immigration, allowing those with skills we need to enter legally for a number of years could go some way to cooling the labour market and reducing pressure on wages.

It should be remembered that in the long run, the problems are likely to recede, as the euro is likely to bring the different EU economies far more closely in line with one another.

But the process of bringing this about may not be pleasant, with greater potential for booms and indeed busts in the early years.