Because the state of the economy when joining the euro is crucial in judging the success of membership, comparisons between Ireland and Britain are not appropriate, writes Dan McLaughlin.

A few weeks ago a group of British MPs visited Dublin as part of a fact-finding mission on the euro.

They are members of an all-party committee investigating the case for British entry to the single currency and intend to issue a report in March (i.e. ahead of the Treasury report on whether the time is right for the UK to join the single currency).

The visitors met a number of Irish institutions in order to gauge the effect of the euro on the Irish economy and I was present at one such meeting.

They were surprised at my contention that, so far, the euro had been positive for Ireland, explaining that the opposite impression was held in Britain - that joining the single currency had been a negative for the economy and as such a warning for Britain as to the potential pitfalls of EMU membership.

I held that the state of the economy at the time of joining the euro was a crucial factor in judging the success or failure of membership, at least in the short term, and that it would be inappropriate to draw conclusions for any British membership from the Irish experience, beneficial as it has been.

It is remarkable now to think back on how different the Irish economy was in the mid-1990s at the time when the financial markets began seriously to consider Ireland as a realistic candidate for EMU.

The unemployment rate in 1995, for example, was over 12 per cent, indicating that the economy had a massive amount of spare capacity and as such could probably cope with a substantially higher level of demand.

Yet at the time policymakers in Ireland, particularly the Central Bank, had a very negative view of what was sustainable or potential growth in the economy, with many analysts and commentators arguing that full employment was probably around 10 per cent - i.e. a huge swathe of the Irish labour force was deemed unemployable due to structural factors.

Similarly the participation rate of women in the labour force was also low by European standards, and again this was deemed to be a permanent feature of Irish economic life, as was net emigration.

Much has been made of the supply-side factors in place as explanations of the Celtic Tiger but the run-up to EMU was crucial because it removed any domestic policy constraints on demand and as such allowed the economy to grow at what we now know was a much stronger rate of expansion than any one had thought possible.

Interest rates, for example, had generally been very high in Ireland in the 1980s and 1990s, both in nominal and real terms, reflecting a risk premium on the Irish currency.

Rates fell sharply in the convergence period before euro membership and of course then collapsed to the EMU level as set by the European Central Bank (ECB).

The upshot was that Ireland became a very low interest rate economy. Indeed, real rates have generally been negative over the past five years and so consumer spending has been much higher than it would have been without the euro.

Had the Irish Central Bank been free to set rates, the cost of borrowing would have been much higher, particularly as the currency also fell from 1998 to 2001, giving a further expansionary impetus to demand.

The lesson from that experience is that demand in the Irish economy was effectively unconstrained as a result of euro membership, which could have had very negative consequences, but didn't, simply because the supply side of the Irish economy turned out to be far more responsive than anyone thought.

The unemployment rate fell to a low of 3.7 per cent, unthinkable even in the mid-1990s; migration turned sharply positive; and the female participation rate caught up with and then surpassed the European average, driven by married women entering the labour force in unheard of numbers.

Fiscal policy could have been tightened aggressively of course, but in the event it wasn't, because budget surpluses in Ireland are taken as ammunition for tax cuts, as opposed to a potential policy instrument to regulate the pace of demand.

Ultimately, the Irish economy did hit constraints on the supply side, probably around 2000, and would have slowed anyway even if the global slowdown had not emerged to curb demand.

Inflation also accelerated as a response to full employment, but the gains in real output since 1995 have far outweighed the recent inflation losses, to the benefit of the Irish population as a whole.

This cost/benefit ratio may change in the next decade, depending on whether the EMU exchange rate and interest rate configuration is appropriate or not for Ireland, but the lesson for Britain may well be that there is no lesson to be learned from Ireland's membership of EMU, at least one that can inform the British debate on the single currency.

Dr Dan McLaughlin is chief economist at Bank of Ireland