THE European economy is struggling with high unemployment and taxes, despite the lowest interest rates in 20 years.

The apparent failure of monetary policy to stimulate any recovery confronts policy makers with a similar dilemma to that in the United States in the 1930s. Then, as now, monetary policy appeared insufficient to stimulate demand.

If Europe is really going through a classic credit crunch where credit is freely and cheaply available and yet is not taken up then some other measure is necessary.

But as things stand, with the Maastricht budget criteria tying their hands, policy makers appear to have meandered up an intellectual cul de sac in trying to achieve the impossible. Namely, strong growth falling interest rates and a falling budget deficit.

The simple fact of the matter is that people do not want to borrow money because they feel their taxes are rising. But rising taxes are needed to reduce the budget deficit. Consequently, cutting the budget deficit demands higher taxes and prevents people borrowing.

With regard to European unemployment, one of the reasons it is rising is because the European cost base is rising. One of the reasons for this is because taxes on labour are rising. So a falling budget deficit leads to increases in taxes and decreases the number of people in employment.

This is a similar situation to the 1930s, when the problems of rapidly rising unemployment led to President Franklin Roosevelt's New Deal, forcing Keynesian economics on to the agenda for the first time.

So is there a possibility of a significant Keynesian reflation package for Europe in the 1990s? Unfortunately, the answer must be no.

It is simply impossible to intervene and cut taxes and still keep within the Maastricht rules. Long term interest rates would rise rapidly in France and Germany. They are already having problems keeping their budget deficits below the 3 per cent level stipulated in the treaty.

The extent of the mountain to climb on fiscal adjustment can be seen clearly on the debt/gross domestic product (GDP) ratio in Europe, which has been rising throughout the 1990s. In tandem, politicians across Europe are increasingly concerned about unemployment. The German unemployment rate is expected to average about 10 per cent this year, the highest since the war. French unemployment is expected to be even higher, at 12 per cent.

The problem here is the continuing relationship between unemployment and budget deficits a relationship which is increasingly difficult to disentangle.

Superimposed on this fiscal dilemma is a monetary dilemma where most of the European public regard monetary union as the source of their monetary woes. So politicians have an economic as well as a political problem.

Ironically, achieving monetary union will enable fiscal policy to be expanded because the criteria will, by definition, have been loosened.

But that is a long way off. In the meantime we are in for two years of negative economic sentiment and disappointing figures emanating from the principal European economies.

Ireland does not have the same economic problems as Germany and France precisely because people's expectations are for falling tax rates and more jobs, rather, than the opposite.

The 49,000 new jobs created in 1995 evidenced the new found dynamism in the labour market. For us, low interest rates are a luxury which encourage borrowing. Demand for credit in Ireland has soared to around a 16 per cent year on year increase.

Against this buoyant background, low, interest rates are working and fuelling demand. In contrast, in France and Germany, taxes and unemployment are rising. Low interest rates in this environment are not a sufficiently powerful incentive to kick start the public into spending.

On the Continent, savings ratios have been rising as the public save their money for a rainy day. In fact, as the German discount rate has been progressively cut, private sector credit in Germany has fallen even faster.

So the benign cycle which Ireland enjoys of low interest rates leading to further investment and then to more consumption is not possible for most of Europe and will not be possible until taxes are reduced. A reduction in taxes will have to wait for EMU.

In the meantime, the divergent economic performances between Ireland and the rest of the Union will remain.