With just a few days to go before the Greek drachma passes into history on January 1, the transition to the euro is proceeding smoothly.

Earlier in the week the Bank of Greece finally completed the delicate task of bringing Greek interest rates - which started the year at above 10 per cent - in line with the euro-zone.

The final 100-basis-point cut caused barely a ripple in financial markets, which had long expected the move, and the drachma remained glued to its official entry level of Dr340.75.

"There has been not even the whiff of a speculative attack on the drachma," said one trader. "It's as if the drachma were already dead."

Greek traders have already been limbering up for the new order, said Anna Mihanou, a currency dealer at Commerzbank.

"Banks have been practising trading in euro-dollar over the past three months," she said. "All systems are in order and there is little sense of nostalgia at the demise of the drachma."

In Greece the drachma is likely to go unmourned. Recent polls showed 70 per cent of Greek citizens in favour of euro membership while the drachma - Europe's second oldest currency - is often associated with economic failure. For the euro -zone, the entry of Greece has a symbolic significance far outweighing its economic importance.

Greece will represent just 2 per cent of euro-zone gross domestic product. However, the inclusion of a country until recently considered an "emerging market" has signalled that the euro -zone is not merely a rich nations' club.

As such, Greece is likely to serve as a beacon for aspiring euro members from central and eastern Europe. But Greece is likely to exacerbate the monetary dilemma of the European Central Bank, further testing the notion that one level of interest rates can fit 12 countries. Headline inflation was 4.2 per cent in November.

"Greece is expected to be Ireland number two," said Avinash Persaud, the head of global research at State Street, the Boston-based investment bank, alluding to Ireland's high level of inflation. "This is another headache for the ECB, which faces much higher inflation on Europe's periphery than at the centre."

Inflation may also prove the main challenge for the Greek government. With monetary policy no longer available as a tool to damp inflation, economists are urging the government to keep wages and fiscal policy tight and to accelerate market liberalisation.

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