Vanishing economic growth, rising budget deficits, higher unemployment and a central bank accused of mismanaging monetary policy: it is a formidable mix that confronts European government leaders as they gather on Friday in the Belgian city of Ghent.

The latest bad news comes from Berlin, where Hans Eichel, finance minister, on Thursday sharply reduced his forecasts for German economic growth to 0.75 per cent this year and 1-1.5 per cent next year.

But Mr Eichel's insistence that his government will not adopt an emergency spending programme underlines the complexity of the debate about how to revive the eurozone economy - a debate often caricatured as a struggle between governments eager to spend more and pressing for lower interest rates, and a European Central Bank wedded to an anti-inflationary strategy that risks tipping the region into recession.

One episode illustrates the point. When Wim Duisenberg, the ECB president, told reporters in Vienna on October 11 that the bank had "very little room for manoeuvre", it was not only eurozone governments that were disappointed. Officials from several national central banks took the unusual step of telling private sector economists that Mr Duisenberg's remarks did not adequately reflect the discussion held by the ECB's 18-member council in Vienna. In fact, these officials said, the council had hoped to convey the impression to financial markets that it was open to making an early interest rate cut.

Since last Friday, some ministers, especially in Austria, Belgium, France and Germany, have dropped all pretence at concealing frustration with the ECB's apparent reluctance to cut interest rates aggressively to combat the slowdown that worsened after last month's attacks on the US. But as Thursday's ECB monthly bulletin shows, an interest rate cut is not far away. True, it may come at the second of the bank's next two meetings, on November 8 rather than October 25. The ECB wants to pick the right moment so that the next cut has maximum effect.

The timing of the ECB's next move is only part of the picture, however. All efforts are geared now to avoiding a recession and even more job losses than the tens of thousands announced by companies across Europe since last summer. Beyond that, for the sake of European integration, economic and monetary policymakers want to show a united front in tackling the eurozone's first serious downturn since the euro's launch in 1999. A common triumph over economic adversity might even lend impetus to moves to place the European Union, or its 12-nation eurozone core, on a reformed constitutional footing, an issue up for discussion in Ghent.

For eurozone governments, one burning question is how to use fiscal policy to promote recovery without triggering deficits so large that they undermine a common commitment to budgetary discipline. For the ECB, there is the dual challenge of defending its legally enshrined status as an institution free from political pressure, and winning public confidence in its ability to manage an economic crisis. Last, for the governments of Germany and France, which face elections next year, the pressure is growing every day to show voters that policymakers are taking quick and effective action to protect jobs and incomes.

What is not at stake is the euro itself. The spectacle of politicians rounding on the ECB has not affected the currency's external exchange rate since September 11. In that sense, the single currency has proved itself.

But finding the right balance between fiscal stimulus and monetary easing is a challenge to which European policymakers have not yet found an answer. As some finance ministers ruefully acknowledge, it was easier for the Bush administration to draw up a stimulus package worth $60bn-$75bn after September 11, because the US had a large budget surplus.

In the eurozone, six countries - Belgium, Finland, Ireland, Luxembourg, the Netherlands and Spain - are forecast to have budgets in balance or in surplus this year. But they account for only 23 per cent of the region's economic output. The other six - Austria, France, Germany, Greece, Italy and Portugal - will all run deficits. Most important, three of the largest deficits are expected in France, Germany and Italy, which account for 70 per cent of output.

Partly because of tax cuts introduced earlier this year, and partly because of falling revenues triggered by the slowdown, the French, German and Italian deficits were going up before September 11. These three governments have limited room to pursue fiscal expansion, if they are to respect an EU stability and growth pact. This sets a medium-term goal of budget balance and says that, in normal times, deficits must not exceed 3 per cent of gross domestic product. Countries are permitted to overshoot this limit if they are in severe recession - defined as an annual fall in GDP of 0.75 per cent - but so far no government is predicting such an outcome.

Even without an emergency fiscal stimulus, the German deficit could hit 2.3 per cent of GDP this year and 2.2 per cent next year, according to Goldman Sachs, the investment bank. For France it forecasts 1.5 and 2.1 per cent and for Italy 1.6 and 1.1 per cent. Others are less sure about Italy: UBS Warburg predicts the Italian deficit at 1.7 per cent this year and up to 2.5 per cent next year.

For all three governments, the fiscal outlook will be particularly grim if economic growth falls below targets set in their 2002 budgets. The provisional growth forecasts leaked on Thursday from the Organisation for Economic Co-operation and Development supports the view that the assumptions are too optimistic. For example, Italy's finance bill was based on expected growth next year of 2.3 per cent; the OECD suggests 1.2 per cent.

None of this deterred Germany's trade union confederation on Thursday from urging governments to inject billions of euros into the EU economy in a co-ordinated package. "Financial policies of all EU countries must now subordinate the consolidation of public budgets to the task of safeguarding growth and jobs," said Heinz Putzhammer, a union board member.

France's Socialist-led government is already trying to stimulate the economy, albeit with great care. This week it presented new measures including tax credits for 8m low-income households and incentives for new investors. Jean-Francois Mercier, economist at SSMB, the investment bank, says the measures represent a stimulus of no more than 0.25 percentage points of GDP and are unlikely to increase next year's budget deficit to more than 2 per cent.

Gerhard Schröder, Germany's chancellor, suggested last weekend that his government might follow France's lead. But Mr Eichel's comments on Thursday appeared to rule that out and the Bundesbank fears any stimulus will bring the German deficit dangerously close to the stability pact's limit.

Meanwhile, the Italian government led by Silvio Berlusconi, the conservative prime minister, is under pressure from Antonio Fazio, the central bank governor, not just to refrain from more spending but to apply its deficit-cutting plans with greater rigour.

In all three countries, any stimulus will fall short of the Bush administration's initiative, which amounts to more than 1 per cent of US GDP. Every eurozone government is desperate to restore growth but none wants to break ranks and breach the stability pact. This explains why leaders such as Mr Schröder and Laurent Fabius, France's finance minister, insist that the ECB is better placed to boost the eurozone's recovery by cutting interest rates. The ECB has signalled it recognises its responsibilities. If it fails to cut rates by November 8, the outcry from governments, trade unions and financial markets will be loud indeed.