Ireland’s referendum on the Lisbon treaty on Friday should in principle be about the treaty’s contents, not the state of the Irish economy.  But the economy’s collapse over the past 12 months compels both pro-Lisbon and anti-Lisbon forces to confront the question of whether membership of the European Union - and, specifically, of the eurozone - has helped (even saved) Ireland, made things worse, or not made much difference one way or the other.

An interesting angle from which to approach this question is to ask whether Ireland has fared better than another island off the north-west coast of Europe that was thrown into turmoil at almost exactly the same moment last year - namely, Iceland.  Iceland isn’t a EU member and doesn’t use the euro.  Has this accelerated Iceland’s recovery or held it back?

In terms of headline gross domestic product figures, Iceland comes out narrowly ahead.  Over the last four quarters, its economy has contracted by a cumulative 3.8 per cent, almost half Ireland’s 7.4 per cent, according to a Deutsche Bank study.  But the inflation numbers paint a different picture: Iceland’s consumer price index is up 10.9 per cent since August, Ireland’s is down 2.4 per cent.  Both countries, of course, have horrendously high budget deficits - 13.5 per cent of GDP predicted this year for Iceland, 12 per cent for Ireland.

Unquestionably, the main difference relates to each nation’s external exchange rate and, by extension, its international business competitiveness.  The Icelandic krona all but collapsed after the crisis broke out, whereas Ireland, using the euro, could not devalue.  The result is that Iceland’s unit labour costs have fallen by 29 per cent over the past 12 months and by an astonishing 45. 6 per cent from their peak in the fourth quarter of 2005.   

By contrast, Irish unit labour costs have dropped by only 4.3 per cent over the past year - and this has occurred more because of painful adjustments in the real economy (unemployment, reduced working time, reduced bonuses and wage cuts) than because of exchange rate factors (a falling euro).  Irish exports to the UK have been affected by the steep fall in the pound against the euro.

Of course, the geyser that is the Icelandic economy is still throwing up columns of noxious steam.  Iceland remains vulnerable because of the unparalleled damage inflicted on its financial sector and sovereign debt position.

But the hard truth is that Ireland - like fellow eurozone members Italy, Greece and Spain - has a long and hard road ahead to claw back its competitiveness.  And this is a lesson with even broader implications for Europe.  For when the dust settles, it may well emerge that the financial crisis has served to accentuate the differences in competitive advantage in the eurozone between, on the one hand, Germany and other star performers such as Finland and the Netherlands and, on the other, Ireland and the Mediterranean countries.

One day I’ll break the habit of only visiting Ireland when there’s a referendum on a European Union treaty.  It can easily mislead you into thinking that the Irish people like nothing better than a passionate ”national conversation” (as the latest faddish expression puts it) about Europe.  In fact, it is closer to the mark to say, as Eamon Delaney does in an article for the Irish magazine Business & Finance, that “Ireland is an island with a self-absorbed political culture which is not all that interested in overseas affairs”.

Be that as it may, I’m back in Dublin and the contrast with the political atmosphere of June 2008, when Irish voters rejected the EU’s Lisbon treaty on institutional reform, is pretty startling.  Fifteen months ago, businessmen and economists I talked with were in no doubt that Ireland was heading into a recession, but none predicted the whirlwind that has wrought unmatched havoc on the economy and come close to destroying the national banking system.

This means that on Friday, when the Irish people will be voting Yes or No to the Lisbon treaty for a second time, the context of the vote will be radically different.  Questions such as whether the treaty might compel young Irish men to serve in a European army (a false allegation that surfaced in last year’s campaign and damaged the pro-Lisbon camp) just do not seem relevant, given Ireland’s dire economic condition.

I have in my hand a leaflet produced by Ireland’s small Socialist party, and distributed this morning just off O’Connell Street in the heart of Dublin, which urges: “Reject the Lisbon treaty!  Defend workers’ rights!”  The leaflet’s argument is poorly presented, but its authors are nonetheless on to something.  They want to link the campaign to what is undoubtedly the central concern of most Irish people - how to get by at a time of falling wages, failing businesses and a jobless rate set to hit 16 per cent of the workforce next year.

The leaflet is also correct to draw attention to the much more active involvement of business interests on the side of the pro-Lisbon forces this time round.  The leftists’ language is intemperate - “Why would a viciously anti-union and anti-worker company like Ryanair be spending 500,000 euros to promote a Yes vote for a treaty that will supposedly defend workers’ rights?” - but they are right that business wants voters to reverse the verdict they passed on Lisbon little more than a year ago.

What does the Yes camp say in response?  As far as idealistic dreams of European integration go, very little - and you can see why.  The nation will vote this week with its economy and financial system being propped up, in the last resort, by the European Central Bank and Ireland’s eurozone partners.  This makes fear a potent argument for the pro-Lisbon forces.  As the economics commentator Cormac Lucey puts it: “If we were to vote No … it might make hazy sense for a drink-addled Father Jack swigging vigorously from a whiskey bottle, but it would be an act of collective insanity for Ireland.”

From a European Union perspective, it’s somewhat surprising that the extraordinary financial crisis we’ve been living through has not generated more pressure for another big push at EU integration - if not in the political sphere, then at least in the economic one.  According to conventional EU wisdom, it usually takes a crisis to make Europeans understand why closer integration is a good thing.  But on this occasion, it’s not happening - or at least, not yet.

For the perfect explanation as to why this should be so, I recommend an article by Otmar Issing, the European Central Bank’s former chief economist, in the latest issue of the journal Europe’s World.  Issing’s article discusses the merits of issuing common bonds for the 16-nation eurozone - an initiative that would, in theory, mark a major step forward in European integration - and comes down firmly against the proposal.

Why?  The idea appeals to Dominique Strauss-Kahn, managing director of the International Monetary Fund, Joaquín Almunia, the EU’s monetary affairs commissioner, Giulio Tremonti, Italy’s finance minister, and many others.  Supporters of a common eurozone bond contend, in essence, that there is strength in numbers and (a more slippery point) that European solidarity is a noble cause.

They say financial markets would show respect for bonds collectively guaranteed by Germany, France and 14 other countries.  A common bond would put paid to the “unfair” practice by which markets have forced countries such as Greece, Ireland, Italy and Portugal to pay substantially higher interest rates on their government bonds, relative to Germany, during the financial crisis.  Europe would stand as one.

Here is Issing’s stony response: “A common eurozone bond would certainly imply that countries like France and Germany would have to pay higher interest rates, and that would in the end mean higher tax burdens for their citizens…  Issuing a common bond would be a first step on the slippery road to ‘bail-outs’, and thus the end of the euro area as a zone of stability.” 

With an eye on Greece, Ireland and Italy, he continues: “The immediate trigger and the root cause of rising spreads were financial markets’ growing concerns about the solidity of some eurozone countries.  This loss of credibility has been a consequence of dramatic deteriorations in their current and expected fiscal positions.  But a common bond is no cure for a lack of fiscal discipline; on the contrary, it would tend to encourage countries to continue on their wrong fiscal course.”

In other words, Greeks and Italians in particular should get their houses in order (the Irish are already trying).  German taxpayers have no obligation to shell out for any country that isn’t hard at work consolidating its public finances.  So says Issing, and Germany’s coalition government shares his views - while admitting sotto voce that if a weak eurozone country fell into truly serious difficulties, Germany would have no choice but to come to the rescue.

Issing’s argument is undeniably powerful.  But I ask myself one question.  The public debts of Greece and Italy are set to shoot up over the next few years.  There doesn’t seem much evidence of an effort in either country to tackle the problem with the determination that Issing regards as necessary.  The longer it’s put off, the harder the task will be.  Just how are they to be persuaded to do it?

Mikolaj Dowgielewicz is truly a new Pole.  Not yet even 37 years old, he is a minister (for European Union affairs) in Poland’s centre-right government, speaks fluent English and French, was educated partly in the UK, and has spent more of his life in an independent democratic Poland than in a Soviet-controlled communist Poland.  When I was listening to him speak at a think-tank breakfast in Brussels this morning, it struck me with force that he would have been just a small boy when I first visited Warsaw, Krakow and Gdansk in the summer of 1980 and witnessed the emergence of the free trade union Solidarity.

Now, like other new Poles, Dowgielewicz talks breezily about Poland’s growing weight in the EU, which it joined five years ago, and its prospects for adopting the euro as early as 2012.  Poland doesn’t want or need the eurozone’s entry rules to be bent, he says.  “We’re not proposing any amendments to the entry criteria.  Not that we think they make absolute sense, but it’s not feasible.  You’d have to change the EU treaties.  We think the criteria strengthen the eurozone’s credibility.  It will have to be down to the merits of each individual country.”

Dowgielewicz also doesn’t mince his words when it comes to Poland’s exclusion from the G20, the world body charged with the task of reforming global financial institutions.  Better that the EU should have a single seat than that individual European countries should insist on separate representation, he says.  “It’s completely unacceptable that four, five, six countries go to the G20 thinking they can speak on behalf of the whole EU.”

All in all, one gets the sense that Dowgielewicz sees Poland as a country firmly, indeed irresistibly, on the way up.  “We’re gaining in confidence.  We’re going to be the seventh largest economy in the EU this year.  If the economic crisis continues for several more years, we may even overtake other economies.”

There is no hint here of pride preceding a fall.  Which EU countries, then, does Poland take as its models in achievement and conduct?  “We used to say Ireland was the role model for every new member-state, but now that’s a bit difficult,” he says, alluding to the Irish financial crisis and recession.

Dowgielewicz goes on: “When it comes to EU budget negotiations, we’ll draw lessons from Spain.  When it comes to promoting our own nationals in Brussels, we’ll draw from the British.  And when it comes to Euro-enthusiasm, we’ll draw from the Italians.”

There are two schools of thought on whether Latvia should devalue the lat, or fight tooth and nail to keep its currency peg to the euro.  One, espoused by the Latvian government, the International Monetary Fund  and the European Commission, is that devaluation would destabilise the Latvian banking system, wouldn’t really address the long-term challenges facing the Latvian economy, and would risk spreading shock waves beyond Latvia across the Baltic and into other parts of central and eastern Europe.

The other view, espoused by some of the world’s leading economists, such as Paul Krugman and Nouriel Roubini, can be summed up as: “Get Real”.  Without devaluation, the only path that Latvia can go down to extract itself from crisis is massive deflation, through spending cuts and sharp falls in wages that will inflict terrible damage on society and will unnecessarily prolong Latvia’s recession.

There is a lot to be said on both sides of the argument.  Devaluation would clearly be a very serious matter for a country where loans in foreign currencies account for 85 per cent of total lending.  Mass defaults would follow.  And it is by no means clear that devaluation would give a boost to exports.  Wood in its various forms - sawn wood, plywood and fuel wood - represented 20 per cent of Latvia’s total exports in 2007, but right now the world’s construction and housing sectors are in very poor shape and aren’t exactly thirsting for Latvian wood.

My own view is that, like most difficult economic choices in democracies, this is in the end a political matter.  If the Latvian population is prepared to tough it out, and if the Latvian political classes have the stomach to preside over years of horrendous deflation, then they should be free to go for it. 

But I have a caveat.  It is pretty clear that the only reason why the Latvians think it’s worth accepting all this pain is because they have a burning ambition to join the eurozone.  Latvia, which was annexed by the Soviet Union in the 1940s and only managed to break free in 1991, is already in Nato and the European Union.  Eurozone membership would underpin Latvia’s independence by anchoring the country more deeply than ever in Euro-Atlantic structures.

What EU policymakers should really be looking at is a way to accelerate Latvia’s entry into the eurozone, so that the economic pain and social strains associated with sticking to the currency peg last for as short a time as possible.

The trouble is, this option isn’t under serious consideration in Brussels or at the European Central Bank.  And that is why devaluation, though it is by no means the answer to Latvia’s troubles, remains a distinct possibility.

European Union policymakers like to make the point that, had the euro not existed, Europe would have suffered far more from the financial crisis and recession. Without the euro, there would have been a riot of competitive devaluations, causing angry recriminations among governments. Without the euro, countries such as Greece and Italy would have had nowhere to shelter from the storm. Without the euro, Ireland would have gone belly up and Dublin would be known as Reykjavik-on-the-Liffey.

All this is doubtless true. But if the euro is so successful, why is it unlikely to emerge from the economic crisis with an enhanced status in the global monetary order? This is a question asked, and answered very convincingly, in a new book, The Euro at Ten: The Next Global Currency?

“It is revealing that even in the midst of the worst financial crisis in 70 years, one widely and somewhat justifiably believed to have begun in the US economy and resulting from US policy mistakes, the flight to safety of world savings was to US treasuries, and not noticeably to the euro,” say the book’s authors.

They make four main points. First, the US has highly integrated financial markets, whilst those in Europe are fragmented. European banking and financial supervision is under national control. There is no single market for government bonds.

Secondly, the eurozone lacks the right rules and tools of governance. It does not have effective representation at global level in forums such as the International Monetary Fund. The area’s response to last year’s emergency in the financial sector was, to begin with, feeble and driven by national considerations. When it finally came up with some answers in October, the measures took the form of “ad hoc co-operation rather than of institutionalised co-ordination”.

Thirdly, eurozone governments have failed to make the euro an anchor of regional stability in eastern Europe. The crisis has made most EU countries outside the eurozone more eager than ever to adopt the euro, but eurozone leaders have rebuffed them.

Lastly - and, in my view, this is the killer argument - the size of the eurozone economy looks certain, in coming years, to shrink relative to the rest of the world. East Asia, the Gulf states and Latin America are all studying the possibility of regional monetary integration. That would leave the euro as a regional currency for Europe and not much more. China is calling for a new reserve currency to replace the dollar, but it’s certainly not thinking of the euro.

“There is no question this year will be a stress test for the European single currency,” Joaquín Almunia, the EU’s monetary affairs commissioner, said last week.

He was right - but the longer-term question is whether the euro’s international role is doomed to be permanently limited.

If you think the economic news is grim in the US, the UK or Germany, spare a thought for the small Baltic states of Estonia, Latvia and Lithuania. All face the prospect that their gross domestic product will collapse this year by 10 to 12 per cent. Moreover, all operate a so-called currency board regime, or peg, which restricts the movement of their currencies against the euro and prevents them from stimulating economic recovery by means of exchange rate depreciation.

One answer, as the International Monetary Fund pointed out a few weeks ago, would be for the European Union to relax its rules and let the Baltic states swap their currencies for the euro without formally joining the eurozone. This would in principle ease their foreign debt problems and restore confidence among foreign investors. The alternative - severe government austerity programmes, followed by a sharp drop in living standards, social unrest and political instability - seems far too harsh and risky a solution.

But the EU’s authorities, especially the European Central Bank, are dead against unilateral adoption of the euro by any EU member-state. One can see why. If the experiment went wrong, there would be a danger of contagion spreading to the 16-nation eurozone itself. The guardians of European monetary union, a project only 10 years old and one that is central to the notion of ever closer European integration, are simply not prepared to take the risk.

Across central and eastern Europe, however, the voices speaking up in favour of a rapid, unorthodox switch to the euro are getting louder. Today it’s the turn of Ludek Niedermayer, a former deputy governor of the Czech central bank, who writes: “Unilateral adoption of the euro would be extraordinary. But so too is the economic crisis. Tolerating such a move would not reduce, but rather boost, the EU’s credibility.”

What almost no one has bothered to mention so far in this debate is that two places in central and eastern Europe already use the euro without being formal eurozone or even EU members. They are Montenegro and Kosovo, which unilaterally adopted the euro on January 1, 2002, at the same time as France, Germany and other founder-members of the eurozone. This has given Montenegro and Kosovo some protection against the whirlwinds whipped up by the world economic crisis.

Amazingly, though, Montenegro’s authorities - or, at least, the chief economist at its central bank - do not recommend unilateral adoption of the euro by the Baltic states and others. Such a step would risk incurring the wrath of EU policymakers and even the denial of various EU funds and grants, the Montenegrins caution.

To summarise: a country that is outside the EU and outside the eurozone, but uses the euro, is telling countries that are inside the EU but outside the eurozone not to use the euro, while the EU and eurozone let countries that are outside themselves use the euro but won’t extend the privilege to countries inside the EU but outside the eurozone.

There are the makings of a good farce in this - if we weren’t all losing our money.

When I lived in Poland in the mid-1980s, I was once given a one-zloty coin for Christmas. This was no ordinary one-zloty coin, however. It was stamped on one side with an image of the Lenin shipyard in Gdansk, the birthplace of the Solidarity independent trade union. Poland’s Communist authorities had suppressed Solidarity under martial law in December 1981. Underground Solidarity activists used to take away the coins, stamp them with the shipyard’s image and then put them back into circulation as a way of reminding Poles that the movement had not disappeared altogether.

Today Poland’s government is keen to switch from the zloty to the euro. Like other governments in the region, it sees early eurozone entry as a way of protecting its economy against the world financial crisis. Poland envies Slovenia and Slovakia, which qualified for eurozone membership ahead of other new European Union member-states. They are now reaping the rewards of belonging to a large and - whatever the tensions generated by the financial crisis - broadly stable single currency bloc.

The question is whether Poland would be taking too big a gamble by aiming for quick eurozone entry. Under EU rules, a candidate member must spend at least two years in the so-called ERM-2 exchange rate mechanism, ensuring the stability of its currency, before it can adopt the euro. At their summit in Brussels on Sunday, some EU leaders indicated they were open to the idea of shortening the two-year preparation period. But they took no decision, and it is far from clear that the European Central Bank would favour such a step.

The zloty has lost about a third of its value against the euro since last July, part of a much wider picture of exchange rate turbulence in central and eastern Europe in recent months. Perhaps joining the ERM-2 would deter speculators from betting against the zloty. Or perhaps Poland would suffer the fate of Britain in 1992, when the pound was ejected from the first ERM. With so many Polish companies and households having borrowed in euros, another run on the zloty could trigger a disastrous debt emergency.

In the end, Poland would survive in the ERM-2 if financial markets judged that its economy was fundamentally healthy and competitive. But a lot would depend on what band was set for the euro-zloty exchange rate. Part of Britain’s problem in the early 1990s was that the pound’s rate against the German mark was unrealistically high. In any case, the words of Miroslaw Gronicki, a former Polish finance minister, are worth bearing in mind: ”It’s an axiom that you don’t switch to a less flexible currency regime in a crisis.”