In June the prices British manufacturers paid for their raw materials and fuel jumped by 30 percent from the previous year. Motoring costs are up 24 percent and food prices up 10 percent.

And yet foreign investment into London reached a record high this year, despite the financial crisis. A record 178 international companies set up or expanded business in the capital in the year to March, pumping $1.5 billion into the city's economy and creating more than 6,000 new jobs. Most of the investment, about 30 percent, came from the United States, 9 percent each from India and China, 8 percent from Australia, 7 percent from France and 6 percent from Japan.

In short, the British economy is in trouble, with growth stalled, inflation letting rip, house prices dropping, unemployment rising and the government's finances getting deep into debt. But foreign investors are fighting to get in.

Then take Europe, where the new head of the European Bank for Reconstruction and Development is warning that the long boom in Eastern and Central Europe is being punctured by inflation, "which is double-digit or which is even above 20 percent." Thomas Mirow, the bank's new president, said inflation at this level "has the potential to destroy part of the progress that has been made in many of these societies."

Spain, Ireland and Britain are reeling under the collapse of their housing booms. Germany's export growth has hit a wall. Eurozone inflation has just topped 4 percent. French wages are falling in real terms. Germany's ZEW investor confidence index has slumped, and the Allianz financial giant warned last week that Europe's growth would be zero unless oil prices dropped sharply.

The European Union's statistical arm reported a 3.4-percent fall in eurozone exports in May, and industrial output figures for May showed the biggest monthly drop since the 1991 recession. Car sales in Europe are down 8 percent on the year, and the Eurofirst 300 index, which tracks the performance of the top 300 companies, is down 25 percent this year. A survey by Merrill Lynch found 96 percent of fund managers expecting slower growth in the eurozone, and 42 percent of the 191 people surveyed reckoned that a recession was "very" or "fairly" likely.

Oh yes, and Belgium is falling apart again, its French-speaking and Flemish-speaking communities simply unable to form a government together. The king is keeping the show on the road by refusing to accept his prime minister's resignation. But at the heart of Europe, in Brussels, which is nominally the EU capital, the vaunted ability of the EU to overcome national and ethnic differences is looking somewhat hollow.

In France, President Nicolas Sarkozy faces a bitter defeat in the French Parliament this week over his attempt at constitutional reform, at the hands of an unholy alliance of Socialists who hate everything he stands for and old Gaullists who fear his reforms undermine the old general's legacy. In Germany, Chancellor Angela Merkel is calling her coalition partners "unreliable," and in Britain, Prime Minister Gordon Brown has the lowest approval ratings since records were first kept.

These problems of governance at the national and EU level are important because they undermine people's faith in the ability of their governments to get out of the economic mess.

But none of this seems to trouble sunny Jean-Claude Trichet, president of the European Central Bank, who now claims eurozone growth is likely to rebound in the autumn and to avoid a recession or even much of a downturn. He admitted to expecting a growth "trough" in the second and third quarters of this year, but then expected "a progressive return to ongoing moderate growth."

Trichet's remarks were no casual aside. They came in the form of an interview with newspapers from four different eurozone countries, one of his preferred modes of communication when he wants his statements to have real impact.

The deliberate implication of his optimistic assessment was that the eurozone was not going into recession, and therefore that he was not planning any interest rate cuts of the kind imposed by his U.S. counterpart Ben Bernanke. Trichet's fear, it was clear, was inflation, and he was prepared to keep interest rates at 4.25 percent (double the U.S. level) to wring inflation out of the system. How inflation can be tamed with oil at $150 a barrel and food prices soaring was not immediately apparent.

"We will do in the future what is appropriate to deliver price stability in the medium term," Trichet said.

If Trichet is wrong, the contradictions between his optimism and the gloom in the markets and corporate suites will come back to haunt him, just as, in Britain, Gordon Brown's overconfident move into deficit-financing and government borrowing has derailed what had been the best-performing big economy in Europe over the past 15 years.

Mervyn King, governor of the Bank of England, warmed some time ago that what he called "the NICE decade" (non-inflationary continuous expansion) was probably going to be followed by a considerably nastier period. Biblical scholars will recall the good book refers to seven fat years being followed by seven lean ones. Whatever Trichet may say, it certainly feels as if the down phase of the cycle is upon us.

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