Anyone wanting a clue as to how the UK might fare inside Emu could do worse than watch Ireland

Under the Maastricht criteria, inflation could not be more than 1.5 percentage points higher in any aspiring member of economic and monetary union than in the average of the three best performing countries. By hook or by crook all 11 founder members managed to come within this band in 1997, the last full year for which data were available when the initial membership was decided.

Although the euro-zone is still enjoying low average inflation, the range has widened. In France and Austria consumer prices are 0.6 per cent higher than a year ago, on the harmonised index, and in Germany 0.8 per cent. But in Spain they are 2.5 per cent, and in Ireland 2.6 per cent, higher. Thus in the last two countries inflation is now outside the Maastricht range.

At first sight there is nothing surprising about the outriders. The two highest inflation members are among the peripheral countries that Germany was reluctant to admit.

But before concluding that those who wanted to start with a more limited Emu confined to the Franco-German core and its neighbours were right, look at some other data. The second chart shows that the peripheral countries also did relatively well in terms of growth. The obvious case is Ireland which has seen an average 9 per cent increase in gross domestic product in the past two years. Spain also performed better than the main European cluster.

The main reason for the rapid growth of the peripheral countries is structural. After many years in which they lagged behind the heartlands of Europe, they are now catching up with a vengeance. Rapidly growing countries not only tend to have higher inflation than others, but can get away with doing so.

Because productivity in these countries is catching up, businesses can afford to increase pay faster than in mature economies without becoming uncompetitive.

But there is a difference between two sectors of the catch-up countries. These are the traded products sector, which either produces exports or is subject to import competition, and the more sheltered domestic sector. Differential productivity gains have usually been larger in the traded sector.

Of course, the two compartments are not watertight. High pay increases in the traded sector spill over into the sheltered sector. They have to do so if the sheltered sector is not to lose its workers. Here pay increases have to be passed on. Taking the two sectors together, we obtain a higher rate of price increase in the catch-up peripheral countries than in the euro core. A recent study cited by David Walton of Goldman Sachs suggests that inflation may safely vary over a range of 2 percentage points over the euro-zone for productivity catch-up reasons.

If that were all, there would be no problem. But in rapidly growing countries it is possible for animal spirits to gain the upper hand and for demand and output to rise even faster than the underlying growth of capacity, and thereby produce overheating. Indeed, up to last year Irish real interest rates were at 6 per cent, some 2½ percentage points higher than German ones, to cope with this very problem. Now they are a good deal lower. Yet Irish policymakers make no secret that, if they could still determine interest rates internally they would have risen rather than fallen. There has been a similar phenomenon in Spain.

Does that mean that Ireland must experience a boom-and-bust, which will act as an awful warning to Britain which looks like needing higher interest rates than the euro-zone for quite a few years to come? Nature's way of eliminating overheating would be for rapidly rising wages in the domestic sector to spill over into the traded sector, thus making the whole economy uncompetitive. The result would be an all too familiar recession and shake-out in the labour market, after which growth might resume.

At this point we need to go slowly. Irish overheating is initially showing itself in the non-traded sector, above all in the property market. A discrepancy in headline inflation rates is not a blow to the European Central Bank. Its treaty objective is to stabilise the purchasing power of the euro, in which countries such as Ireland and even Spain have a modest weight.

The boom and bust scenario assumes that Irish businessmen and trade unionists in the traded sector are extremely short-sighted. Surely they can see the futility of excessive pay increases going even beyond those justified by rapidly rising productivity. Thus they need not happen; and the inflationary impact of Irish overheating could be confined to the sheltered domestic sector. It would be like a boom in a specific region of a long established currency area such as the US, where the range of inflation differentials between cities has varied between 2 and 5 percentage points.

There is another factor in the Irish case. Ireland has a pool of expatriate labour which can be attracted back when the home economy is flourishing and which puts a brake on wage inflation. The traditional pattern of emigration has been succeeded by net immigration, amounting in 1998 to 1½ per cent of the working population. This might make the Irish case an over-optimistic example for Emu supporters. We are then left with the injunction: watch Spain, which is all right as far as it goes. But structural differences with the UK may be too great to make what happens there decisive.

It has to be admitted that, even if peripheral countries with a real interest rate lower than they would ideally like can pull through, the same might not apply to the opposite case. This consists of countries, which, because of the euro, now have, or will have, higher real interest rates than they would have if left on their own. The most likely case is Germany - the most slowly growing member of the euro-zone - a fact which would have astonished both europhiles and eurosceptics a few years ago.

German business now faces the challenge of having to stimulate itself without using the interest rate or devaluation weapons - and doing so without exporting all new jobs to cheap labour countries. It is too early to write off its success in so doing.

Meanwhile, there is little likelihood that anyone will be able to decide objectively either from developments within the euro-zone, or from British data, whether the famous five economic tests for membership laid down by Gordon Brown have been satisfied during the next UK parliament. Both the ECB and the UK monetary policy committee can, if sensibly managed, provide a framework for non-inflationary growth; and the choice between the two is mainly a matter of political instinct.