The dispiriting thing about this year from the euro-zone's point of view is that 2000 opened with many forecasters predicting that growth would at last catch up with, or even overtake, the US.

Nine months down the line, it is clear that in spite of the signs of a slowdown, US growth will still comfortably exceed euro-zone growth this year. Europe, too, is beginning to slow, without ever having matched the dazzling rate of expansion that it has watched and envied on the other side of the Atlantic.

With euro-zone unemployment still stuck at more than 9 per cent, the prospect that recovery may already be faltering is an alarming one for Europe's governments.

The euro-zone is still far from slipping back into stagnation. Analysts expect robust growth of 3 per cent or so next year, after about 3.5 per cent this year.

The fear is that the European Central Bank will not be able to demonstrate convincingly that it has brought inflation back inside its 2 per cent target, without bringing the decline in European unemployment to a halt.

The problem for euro-zone inflation has been a lethal combination of rising oil prices and a falling euro, which have been about equally responsible for driving inflation through the target ceiling.

Europe is much less energy-hungry than America - Germany and France use less than 60 per cent as much energy per unit of output as the US - and the direct impact of higher oil prices on the cost of living is cushioned by higher fuel taxes.

But while the price of benchmark Brent crude has tripled in dollar terms, it has quadrupled in euro terms. And while other commodity prices have been roughly flat in dollar terms, the Economist's index shows industrial commodities rising at more than 20 per cent a year in euro terms.

With average pay settlements running at a rate of around 2.5 per cent, core inflation clearly remains subdued, according to Michael Dicks, chief European economist of Lehman Brothers.

"The ECB's measure of labour costs did rise 3.6 per cent in the first quarter, but that was mostly overtime-related. Even if pay rises stay at 3.5 per cent, trend productivity growth is around 2 per cent, so that would be perfectly compatible with consumer price inflation of less than 2 per cent," he says.

However, the ECB has defined its inflation objective in terms not of core inflation but of headline inflation, and on that measure prices are unequivocally rising too fast.

Some economists argue that in choosing such a tight limit, the ECB has needlessly committed itself to tighter control of inflation than Europe has achieved for decades.

But having nailed its colours to the mast, it has no alternative but to defend that target. As a new central bank with no track record or reputation behind it, the ECB has to work harder than, for example, the US Federal Reserve to establish its credibility.

"In the 1970s many European countries saw inflation rise to double-digit numbers. Now we are talking about it going from 2 per cent towards 3 per cent, which is basically meaningless," says Charles Wyplosz of the European think-tank, the Centre for Economic Policy Research.

"But the ECB has been saying 'we do not go over 2 per cent, it is an absolute ceiling', and now it has to fight for its virginity."

One danger in the ECB's approach is that interest rate rises seem to be having a counter-productive effect on the euro. Direct and equity investment flows apparently now dominate the foreign exchange markets, and pushing up interest rates has made the euro-zone a less attractive place to invest. So although the ECB has tightened monetary policy more aggressively than the Fed in the past year, and is expected to continue to be more aggressive in the year to come, the euro has continued to fall against the dollar, hitting new record lows in September.

With the decline in the currency fuelling inflationary pressures, some analysts have warned of the risk of a downward spiral of a falling currency, rising interest rates and slowing growth. The ECB must tread very carefully indeed along the narrow path of keeping the lid on inflation without smothering growth.

The picture is not uniformly bleak. The booming countries on Europe's fringes, such as Ireland, would be quite happy to see more moderate growth. The two biggest countries, Germany and France, are about to get a further boost to demand from tax cuts.

"European fiscal policy has since 1992-93 been hugely restrictive. Now it is turning from restrictive to neutral, and more expansionary in many countries," says Alain Bokobza of SocieteGenerale. "So the overall policy mix is not that restrictive."

But ultimately, the key questions about the European economy are not macro-economic but micro-economic.

Getting the right combination of growth and employment creation depends less on monetary or fiscal policy than on the willingness of Europe's leaders to tackle the hard questions of structural reform.