On the face of it, there is ample reason for optimism.

Inflation in Europe is at its lowest level in almost half a century and growth, even among the 11-member zone's weakest members, is expected to exceed 2 per cent next year, according to official forecasts.

Europe's left-leaning governments have pledged to toe the line fiscally and Europe's new central bank has rewarded them with an early Christmas present in the form of across-the-board interest rate cuts.

Even those critics who questioned the feasibility of pulling together 11 distinct economies under a single interest rate have fallen silent as Europe's economies have aligned themselves in a manner not seen in decades.

Why then, have Europe's top political and monetary officials spent much of the last quarter fending off fears of confidence crises and credit crunches?

The truth, experts say, is that beneath the bloc's thin veneer of economic stability lie a host of new landmines that could blacken European prospects in the euro's crucial first year.

"Our central outlook is for reasonably buoyant growth in Europe next year, but obviously there are large risks," said Jonathan Coppel, head of the Organisation for Economic Cooperation and Development's European desk.

"The main risks are external and associated with the effects of recession in emerging markets spilling over into Latin America and into the euro zone."

Political upheaval in Italy, a nasty fight over the presidency of the European Central Bank and a heated debate over the proper level for interest rates all raised questions about the credibility of Europe's ambitious project in 1998.

And the effects of emerging markets turmoil, largely absent for much of 1998, have now begun to cloud the outlook for next year.

The European Commission still expects growth in the euro bloc to come in at a solid 2.6 per cent in 1999 after a healthy 3 per cent in 1998.

And these forecasts are roughly in line with those of the OECD, which, in its recent World Economic Outlook, called for euro zone growth of 2.5 per cent in 1999, following an estimated 2.9 per cent in 1998.

The OECD's outlook, however, provided alternate forecasts in line with a hypothetical "downside scenario" which highlight the ongoing risks for European performance next year.

Under this scenario -- which assumed a deepening of the financial crisis in Asia, a widening of the crisis to Latin America and another correction in global equity markets -- growth in the European Union was seen slowing to an anaemic 0.7 to 1 per cent in 1999.

Many academic and private sector economists believe the pieces may already be in place for a significant slowdown which could pull growth under the 2 per cent mark next year.

"Growth is slowing a lot quicker than people expected," said Bruce Kasman, managing director and head of European economic research at investment bank JP Morgan, which is calling for 1.6 per cent growth in Euroland next year.

Diminished demand from emerging markets is expected to put a sizeable dent in the contribution of net exports to European growth in 1999.

And recent data have shown a marked decline in European business confidence, sparking fears that firms will scale back their hiring and consumers their spending.

Worries about this crisis of confidence, European Central Bank president Wim Duisenberg revealed this week, prompted the recent ECB-led decision to push euro-zone rates down to 3 per cent.

JP Morgan's Kasman said goverment policy in Europe's new left-leaning capitals will be key to the economic outlook, warning that attempts to redistribute income from high-income tax payers and businesses to middle and low income households could backfire.

Labour market reform will also be crucial if politically-charged unemployment rates are to improve over the long term.

"If governments push the corporate sector too hard it's a real danger," he said. "And these governments don't get high marks on their reform content. On the structural landscape Europe is still weak."

This week, Germany's labour office reported that unemployment in Europe's biggest economy rose for the first time in almost a year in November, raising fears that recent advances in the fight against joblessness could be coming to an end and raising concerns of more tension between politicians and central bankers.

Another worry is that the euro could prove too strong at a time when European exports have already been hit by declining global demand.

A Reuters survey of foreign exchange forecasters, released earlier this week, showed they expect the euro to enjoy a robust launch next month and climb steadily against the dollar throughout the first half of 1999.

These forecasts are based on the expectation that the US Federal Reserve will be more aggressive in pushing rates lower next year than its new European counterpart.

"If the ECB is reluctant to relax monetary policy and the Fed moves faster, then there is a chance of serious appreciation of the euro and that would hurt," said Charles Wyplosz, professor of economics at Geneva's Graduate Institute of International Studies. "That is a major risk."

Economists are quick to acknowledge that the dangers inherent in merging 11 economies under a single currency should not obscure the benefits that the euro will offer.

The bloc's 290 million people will reap the rewards of lower transaction costs, increased price transparency and the promise of a greater economic voice on the global stage.

But clearly, Europe's policy makers will have their work cut out for them in the euro's early stages with a slowing economy and uncertain outlook in Latin America and other emerging markets hanging over their heads.

"My own concern is that every week now we get darker forecasts for next year and Brazil is still hanging over our heads," said Wyplosz.

"We may not have seen the bottom of the slowdown. It maystop here but it may not."