The announcement by the British government earlier this week that sterling would not be entering the euro for at least the next three or four years could mean trouble for the Government here. Once we are locked into the euro, sterling's swings have the potential to cause major problems for Irish policymakers.

There is a widespread fear that in the initial years at least, the euro could be a weak currency, with the newly created European Central Bank having neither the moral authority nor hard-line reputation of the Bundesbank.

The new bank will have a much wider remit and focus than the Bundesbank. It will also be struggling to meet the divergent needs of France, Germany and Italy. While the Germans openly admit it will be the needs of the larger countries which will be taken into account when setting interest rates, some bond and currency investors are worried that among the larger countries it could be the needs of the weakest which will dominate.

If this was to happen, Britain and sterling could become a safe haven. After all, British interest rates are higher than those in core Europe and many argue its equities look like better value. In addition, the Chancellor of the Exchequer's move shortly after taking office, to give a relatively free hand to the Bank of England in setting interest rates, is already a positive factor for sterling.

In addition, Mr Brown's announcement that he intends to get the economic cycle more into line with those on the Continent, points to even higher interest rates and possibly higher taxes, which will also boost sterling in the short term.

These factors are likely to dominate over the next year and probably until the euro comes into being. This will prove troublesome for the authorities here.

It is now clear that the central rates in the ERM will almost certainly be used to convert the various national currencies to the euro when the announcement is made in May next year. That would prove easy for most of core Europe, although there have been vague hints that the Finnish markka and Italian lira may have to revalued. Most sources, however, rule out a broad-based realignment on the eve of the decision.

However, for many Europeans the Irish situation is rather different. They simply look at the pound's position at the top of the ERM group, more than 7 per cent above the weakest currency. While this is well within the 15 per cent allowable in the band, it is still substantially above any other currency.

Earlier this week, six very influential German economic institutes argued that while central rates would be used for the conversion, the pound's central rate would need to be revalued.

Even the possibility of such a revaluation is enough to keep the pound well supported and above its central rate in the ERM. This may suit the authorities here in the short term, as it keeps inflationary problems at bay. But while sterling remains high, it means the extent of the fall in the pound if we do join at our current central rate possibly 20 pfennigs almost overnight in May could have unwelcome implications.

Indeed, one of Mr Brown's stated reasons for keeping Britain out of the euro in the beginning is the damaging impact which a rapid fall in the exchange rates and interest rates could have on the economy. The Irish authorities face exactly the same dilemma, but have decided nevertheless to go into the system. The overall benefits, they argue, will outweigh any disadvantages which these falls might bring.

On balance, however, the authorities here would probably like to enter at the lowest possible rate; that would be the current central rate of DM2.41. This is the best option in terms of competitiveness and does not risk the wrath of exporters and farmers.

Indeed, a Dublin central banker reputedly did not make any contribution when the question of a realignment came up at a meeting in Brussels recently.

Proponents of a revaluation argue that a higher entry rate into the euro would diminish inflationary pressure by slowing the growth in import prices. An easy way out of this problem would be if sterling gradually depreciated, until we had the dream scenario of falling back towards our central rate against the deutschmark in line with a gradually depreciating sterling.

This appeared to be happening towards the end of the summer, but more recently and particularly after Mr Brown's latest speech that hope is now pretty much blown out of the water.

The major problem for the authorities is that sterling could depreciate after we have made a commitment on the rate we will enter. Such a situation is one of the biggest problems highlighted in the ESRI's report into the prospects for Ireland under monetary union. The danger is that substantial numbers of jobs could be lost as the competitiveness of exporters is hit.

And the danger is that sterling may fall in the early years of the euro. As the time approaches for the British referendum on EMU the markets are likely to become very jittery. If the British economy is also in a downward trend at that time, then a serious setback in sterling must be at least possible. If the pound has already been revalued and joined the euro at a higher rate, then a fall in sterling could have very serious consequences for our competitiveness.

While there is as yet no official indications of what level Mr Brown would like to see sterling entering the euro, many observers believe it could be around the DM2.50 to DM2.60 level.

That could prove very damaging in terms of our competitiveness, if we have already locked in to the euro at above DM2.50.