Christoph Ruckstuhl/AP The biggest cloud on the horizon is over budget deficits

But how long will it be before they start to feel the strain looking after the new bundle of joy?

Although financial markets have given the single currency a warm welcome against a background of subdued inflation, falling interest rates and decent growth, officials worry that euro-zone governments have not sufficiently adapted their economic and fiscal policies to the reality of fixed exchange rates.

"A number of European governments haven't understood yet what giving up monetary policy means for the management of economic policy as a whole," a senior European official said.

"With a smaller tool box, you have to use the remaining tools more adroitly. But this hasn't crept into politicians' minds yet, especially in the areas where they have most immediate control — fiscal and tax policy," he added.

The biggest cloud on the horizon is over budget deficits.

All may be well for now but the worry is that center-left governments — of which there are 13 in the 15 member union — will try to spend their way out of trouble if unemployment in the EU, now around 18 million, fails to respond to historically low interest rates.

The first big test, according to this line of thought, could come when the German government comes to prepare its budget for 2000 if growth is sagging further.

The Commission is preparing to revise down its 1999 EU growth projections, and the closely watched IFO business climate index weakened on Thursday for the seventh month in a row.

Finance Minister Oskar Lafontaine, belying his reputation as a tax-and-spend socialist, on Wednesday proposed a 1999 budget deficit virtually identical to the shortfall he inherited from Helmut Kohl's conservative government.

But if the labor market does not pick up, some analysts fear Lafontaine may be tempted to crank up the deficit, with unpredictable consequences for monetary policy, markets and other governments.

"It won't be easy for other Social Democratic governments to defend budget austerity if they see Germany relaxing," one said.

With the escape valve of currency devaluations closed off and interest rates in the hands of the independent European Central Bank in Frankfurt, ministers are aware that they will need greater flexibility in the fiscal policy areas of taxation and public spending.

To give themselves leeway, they agreed to try to balance their budgets or achieve a small surplus by 2002.

From that level, it was reasoned, they could afford to crank up spending in the event of a downturn without breaching the deficit ceiling of three percent of Gross Domestic Product (GDP) set by the growth and stability pact, intended to prevent profligate governments undermining the euro's stability.

The concern of the ECB and the European Commission is that governments — especially the powerhouse trio of Germany, France and Italy — are not making enough hay while the sun shines to tide them over when the economic climate turns harsh.

In 1998, a good year for the European economy, the structural deficit of the euro 11 — adjusted to strip out the effects of cyclical growth — increased to 2.1 percent of GDP from 2.0 percent in 1997.

The Commission's target is for the structural deficit to fall to 1.8 percent of GDP this year and 1.7 percent in 2000.

"Deficit ratios are still too high to put debt levels on a rapidly declining path," ECB President Wim Duisenberg complained at a European parliament hearing on Monday.

Euroland's general government debt was estimated at 73.8 percent of GDP last year, but the politicians are committed to the Maastricht treaty's reference level of 60 percent.

Belgium, for example, aims to achieve a primary surplus every year of six percent of GDP until it has reduced its huge stock of debt to the 60 percent Maastricht target. It fell to 116.5 percent last year from 121.9 percent in 1997.

In France, Prime Minister Lionel Jospin on Thursday promised to cut the public deficit to "near one percent of GDP" by 2002.

This year it would fall to 2.3 percent from 2.9 percent.

But he added that to cut further and faster "is not this government's choice, because that would weaken internal demand at a time when international economic activity is slowing, which would lead to a mortgaging of growth."

Language like this — along with concern about frustratingly slow progress in eliminating distortions in the markets for goods, services and capital — causes some officials to worry about the longer-term success of the stability pact, and of economic and monetary union (EMU).

The reservations do not change the euro's glowing early report card. But they do mark a recognition that years of grinding, politically tough reforms still lie ahead.

"EMU is only a start," Yves-Thibault de Silguy, EU commissioner for economic and monetary affairs, said. "There's still a huge amount of work to do."