With the end of fighting in Iraq, the logical thing would have been for optimism to return to the markets – more so in business and consumer confidence. The easing of uncertainty regarding the duration and scale of hostilities and possible diplomatic incidents did nothing to dampen the heavy atmosphere clouding the European economy for months. What’s more, the barometric low seems likely to remain during the months ahead. The latest figure of the purchasing managers index for large European companies, released last week, was again on a downward slope, confirming that, despite some stamina by consumers, prospects for growth in the second quarter of the year are not great. Even should the final figures for the first quarter be above expectations, the first half of 2003 will confirm analysts’ worst fears. To be sure, Europe remains dependant on US-led growth. Germany remains the weakest link in the chain, with the gloomiest outlook. Not only are orders falling at home, consumers in the big foreign markets for German products are spending less, and the continuing perky rise in the value of the euro is threatening to make things much worse. On the other hand, the end of uncertainty, which restrained enterprises and households from making investment and consumption decisions, is certain to lead to a stabilization of adverse factors. The first-quarter financial results from European enterprises are better than the older pessimistic forecasts and, in some cases, show a certain dynamism, reflecting that cost-cutting initiatives and the abandonment of loss-making activities are beginning to bear fruit. The issue of the financial health of enterprises is crucial for the Greek economy. Although precise measurements of the present situation at many firms are not possible, it is common belief that in the next six to eight months, a group of eight to 15 medium-sized to large Greek companies will come face to face with harsh reality. Delays in the disbursement of European Union investment subsidies under the Third Community Support Framework is one adverse factor: Prime Minister Costas Simitis called a meeting on the evening of May 1 to discuss the state of the large information technology package for the public sector, named «Information Society.» Besides, it seems that the issue is a major factor behind the recent allegations of graft that are causing turbulence in the ruling party. Falling demand for Greek exports and tourism will be another source of pressure on firms. As regards the government, the problems arising from the fast rise in expenses, combined with a review of certain items in the budget, are bound to increase the difficulties in the execution of the budget as approved by Parliament. But whatever the situation in the Greek economy’s rather protected internal sector, the external environment will remain a substantial and open threat. The European Union does not yet seem ready to assume initiatives toward adjusting and upgrading the supply side of the economy, as structural changes remain low on the political agenda of governments in the big member states. Moreover, a reduction in euro rates looks like it will be put off until next month and perhaps even later, as the European Central Bank now seems more worried about inflation; we will probably have to wait for the new framework of European Central Bank rate policy in early summer for signs of the eurobankers’ intentions. What remains is hope of a US «exported» recovery. President Bush’s plan for tax cuts – and the new rise in the US government deficit – is supposed to be toward this end. But realization of this scenario is fraught with dangers. The US balance of payments deficit, already at record levels (5.3 percent of GDP in 2002 from 4.5 in 2000 and 3.4 percent in 1987) is a serious matter and likely to grow worse. If it rises to around 7 percent, the American economy will have to absorb about $3 billion daily from abroad in order to balance out the deficit. Such a development would drain the rest of the world of available capital resources, push the value of the dollar further down and reduce the rates of return of US securities (stocks and bonds), indirectly causing more turbulence in global markets. On the other hand, a rise in US interest rates when available savings are at a minimal level, would make the debts of American households skyrocket. The only rational and safe solution would be a gradual reduction of overconsumption in the US and a simultaneous increase in spending in Europe, Japan and – why not – other poorer areas in the world. But such a way out does not seem politically feasible for the time being.