Hamish McRae: Squawk of protest apart – if the ECB raises rates, how will it affect us?

This will in all probability be the week when Europe increases its interest rates. It will also in all probability be the week when the UK does not increase its rates. Yet they have lower inflation and higher unemployment than we do – and would/ will be increasing rates at a moment of high stress in the fringe members of the eurozone. So what might be the implications of this move?

Assuming that the European Central Bank does indeed increase rates, and accepting of course that is not certain, there will be a squawk of protest. It will be seen not just as a blow to Ireland, Greece and Portugal, the three weakest members of the eurozone, but also as increasing the headwinds for the region's business community. Since the main pressure on inflation comes from abroad – from higher energy, food and raw-material prices – is a rise in interest rates really the right response?

Well, it is an important debate and one that we shall soon be having here. Whether or not we get our first rise in May will depend not so much on any change in the inflation outlook, as we are so far over target already, but rather on the performance of the economy in the first quarter. A decent plus and we will get that rise; a scruffy plus or worse and the rise may be delayed until the autumn. But that is for the future, right now Europe is the focus of interest – you might say the battleground.

The case for higher rates is that the recovery seems secure, that inflation is above target and that Germany in particular needs higher rates. The markets expect it. You can derive what they think will happen by looking at market rates, which suggest that by next autumn the ECB rate will be 2 per cent. That would be a "normal" rate, actually historically quite a low rate, for short-term money, and would be consistent with a European economy getting back to normal growth after a severe shock.

This will be the first important rise in rates in the developed world, but the global-tightening cycle has already begun in the emerging world. China has made several such moves, India is tightening too, as are a number of smaller nations. This is the first global upward movement in interest rates to be led by the emerging nations. Viewed from the perspective of the developed world, the ECB will be a leader; viewed in a global context it is merely middle of the pack.

But would this sort of upward profile in rates really do any harm to the European recovery? The honest answer is that we don't have enough experience of ultra-low rates to know what might happen when they come back to normal. We do know that they help bank profits because for a bank to borrow at 1 per cent and lend at upwards of 7 per cent is pure heaven. You can cover a lot of bad debts at that rate. We also know that the relatively few borrowers who have loans tied to official rates have been doing very well. But loan demand remains low, as does supply. We are in a world where no one carries money on deposit if they can think of something better to do. So there has been a return to growth but we do not know to what extent this is the result of very low rates and to what extent it is the natural cycle of activity. Japan's experience would suggest that near-zero rates, of themselves, do not do much to boost demand.

If we cannot really assess the impact of very low rates it is impossible to judge how a climb will affect things. My instinct is that confidence and availability of finance is more important than the price. If that is right then higher rates, provided the climb is not too steep, will not do any damage to the recovery in Europe – or in the UK. Think about it. If banks offered slightly higher interest rates, would you be more or less likely to deposit money there? Thus if banks are able to attract more deposits then maybe they will be more eager to lend. In other words, higher interest rates might increase the supply of credit.

Would a rise in eurozone rates increase pressure on the Bank of England and the US's Fed to follow suit? In theory not, because the Bank is not supposed to take into account what other monetary jurisdictions do, and the Fed doesn't think of the outside world at all. But in practice I think it might. The ECB has a poor record in predicting inflation, having consistently underestimated what might happen, but as you can see from the small graph the Bank of England has an even worse one. Dreadful, in fact: lots of clever people who have got things wrong. By contrast, the Swiss and the Swedes have been spot on, and the Norwegians have actually tended to over-estimate inflationary danger.

In practice I think a move by the ECB might be a tipping point, with May the obvious time for us to increase rates.

And the rest of Europe? To put the problems of the fringe countries in perspective, the issue for them is not the cost of short-term money. It is the cost and availability of long-term money. At the margin any rise in rates is unhelpful but the ECB cannot allow the Irish and Greek tails to wag the German dog. That is a fundamental problem with the eurozone: that the one-size-fits-all policy means that different parts of the currency union will have the wrong rates. But there is nothing to be done about that now.

And the US? So far it has retained its "safe haven" status. When any crisis erupts investors move money into US treasury securities. But nothing is forever. The latest commentary by Bill Gross of Pimco, the huge US asset manager, concludes that some form of US default is inevitable. He is focusing on the fiscal gap, not monetary laxity, but the two policies have supported each other. He comments that the only way out of the US fiscal mess is to default in one of four ways: an outright default (unthinkable, he says); higher inflation (likely, but will not help enough); a decline in the dollar (which is happening); and by keeping interest rates very low and hoping investors won't notice.

If other rates go up, though, investors can't fail to do just that.

Europe hopes this is not yet another false dawn of an Irish recovery

So what happens to Ireland now? It is always difficult to call turning points because the process of any turning point is always messy. In the case of Ireland there have been several false dawns, including the various efforts by the previous government to contain the problems and the bail-out by the EU and IMF.

When we look back on the Irish disaster we will, I think, see the bottom as a long U rather than any sort of V. The place still feels flat – I was in Dublin last week – and the new government has failed so far to turn the mood around. But the export sector is booming and inward investment numbers have remained strong.

The key to banking health will be a floor in the property market. The stress tests imposed on the banks last week, and the restructuring plans, were based on a further fall in property prices but levelling out within two years. Once you know what property is worth then you know how much the loans secured on that property are worth. While half-built housing estates in the middle of the country may be worth nothing and just have to be bulldozed, half-finished office blocks in Dublin are clearly worth something. Once a property market turns it can flip up quite swiftly, as we know elsewhere.

Standard & Poor's, the rating agency, while down-grading Irish debt, now declares that its outlook for the future is stable. The cost of the latest bank bail-out, while high, was within its expectations and it comments: "We are of the opinion that the sharp contraction in Ireland's nominal GDP ... since 2008 has reached an end, and that the Irish economy is now set to gradually recover."

We will forgive it the split infinitive if, indeed, S&P has called the bottom of this cycle – even if the slog back to decent growth will not be evident for another couple of years yet.