Up until the last couple of weeks the market view was that the crisis currently afflicting the global economy would impact on the US to a much greater extent than Europe. This view was reflected in the currency markets, with the dollar falling sharply and the deutschmark gaining due to its perceived safe-haven status in the midst of stormy seas.

European politicians returned from the International Monetary Fund annual bash in Washington apparently shell-shocked at the negative views which were doing the rounds in what was a very downbeat and depressing Washington. They expressed surprise at the extent of the problems, which was quite a bizarre reaction unless one had spent the past six months on holiday in Mars.

However, more recently we have seen the gloom start to hit home in Europe and the deutschmark has suddenly lost some of its shine. This was bound to happen at some stage as there was far too much complacency about Europe. Mention of lower European interest rates is now being heard more frequently and there is a pretty sound basis for such talk.

The European Commission's autumn forecasts really set the ball in motion. This time last year the Commission's forecasts were very upbeat. which helped suit its agenda to keep EMU sentiment on a positive track. The autumn forecasts on the other hand were quite downbeat, but justifiably so.

Growth for the euro zone in 1999 has been projected at 2.6 per cent, down from a projected 3 per cent this year. Such a growth out-turn, if it materialises, wouldn't represent the end of the world but, in the current environment of uncertainty, one couldn't be too confident that such growth would actually be achieved.

Recent business confidence indicators in France and Germany have pointed downwards and other EU member-states look set to follow the same pattern. The stronger dollar and global financial turmoil were described by the Commission as the key factors leading to the downward growth revision.

The main risk to European growth is if the US economy slows appreciably from here. Indeed the word recession is now being bandied about with greater regularity in the US and consumers on that side of the Atlantic are likely to rein in their spending quite appreciably over the coming months in the face of the first seriously negative risks for quite a long time.

From a purist's point of view, one of the worrying factors at play in Europe at the moment is the policy response that is being called for in some quarters. The Italian EU Commissioner in charge of the single market Mr Mario Monti has called for a looser interpretation of what he describes as the German-inspired stability and growth pact.

He went on to advocate greater political control over macroeconomic policy to counter the independent European Central Bank (ECB). Such soundings are worrying and will give some sleepless nights to those Germans, in particular, who were worried that the Italians would revert to kind once admitted to the elite euro group.

The concern now is that having just barely scraped in under the 3 per cent Maastricht ceiling last year, the probable slowdown will cause labour markets and the fiscal situation to deteriorate across the euro zone and we could find out pretty quickly how rigidly people intend adhering to the stability and growth pact.

It is clear that, once the dust settles, interest rates everywhere are going to be lower.

The Bank of England's monetary policy committee has reversed course over the past couple of months. Following the US Federal Reserve's recent cut between meetings, further banking crises and signs of economic slowdown will also force US rates down a lot further. The euro zone will not escape and, despite the ongoing protestations from some officials at the Bundesbank, it is highly probable that if it fails to succumb to rate-cutting pressure over the remainder of its life, the European Central Bank will cut rates early in the new year.

The one thing which could deter the ECB from cutting rates is the political climate which is emerging in the euro zone. Political pressure is coming to bear on central bankers and there is a real threat of fiscal profligacy next year. This combination could force the ECB to dig in its heels and keep rates up. Such an outcome wouldn't be good for euro-zone bond markets, but would be good for the euro. That is, if one would regard a strong euro as a good thing!

This means that Irish rates will fall to 3.3 per cent and possibly even lower, which is an incredible prospect in light of the amazingly upbeat projections which the EU Commission published for the Irish economy. This very upbeat projection, which appears to fly totally in the face of all economic logic, has been described as being politically motivated. If this is true it shouldn't come as a huge surprise to anybody, as political motivations often underlie economic forecasts, and not just in the Commission.

However, it doesn't matter in the context of interest rates what the motivation is, the bottom line is that interest rates here still have a long way to fall and it is difficult to envisage rates rising very much over the next couple of years at least. The bonanza for borrowers will remain with us, but savers had better beware.

Mr Jim Power is chief economist at Bank of Ireland Group Treasury. The views expressed here are personal.