In 1996, GDP growth in the OECD zone, while slightly accelerating from 2 to 2¼ percent, remained below its long-term average. However, the overall figure masks notable differences between the "triad" – USA, Japan and the EU – due partly to differentials in cyclical stages and partly to structural problems of different nature and urgency. Expansion in the USA was broadly based among the components of aggregate demand and by and large free of distortions. Inflation remained subdued, giving monetary policy little reason for tightening its stance; firm activity and falling unemployment allowed further progress being made in cutting government deficits. By contrast, the upturn in the Japanese economy to an average growth rate of 3½ percent was largely supported by a further substantial increase in public investment spending, although, with interest rates having fallen to a historical low, private consumption and residential building also recovered. In Europe, activity has started rebounding from its trough early in the year, but remained weak under the impact of restrictive fiscal policies, even though private spending on consumption and investment in machinery and equipment proved surprisingly robust. Economic growth in the OECD area is set to remain moderate from now until the end of 1998, with output in many countries staying well below potential over the projection period. While in the USA the pace of activity should keep within the 2 to 2½ percent range, Japan and western Europe should be able to overcome present stagnation tendencies, making for more balanced growth among the industrialized countries. The European countries are facing particular challenges. Unemployment is intolerably high and keeps rising further, a number of rigidities and structural problems are still unresolved, while the EU is preparing for transition to Monetary Union. Persistent high unemployment turns out to be a specific European phenomenon, with an average jobless rate of 10½ percent of the labor force twice as high or even more than in the USA or Japan. Labor market regulations in Europe are more rigid than elsewhere, wage formation is less flexible and income support relatively generous. Despite wide-ranging and sustained efforts, employment policies have not prevented unemployment from rising steadily. However, these policies have proved increasingly costly and resulted in higher taxes and social contributions which by themselves may have created barriers to competitiveness, growth and new job opportunities. In the run-up to Stage Three of European Monetary Union, the projections for 1997-98 are subject to a greater than usual margin of risk and uncertainty. Fiscal policy is expected to further accentuate its restrictive stance, at least in 1997, the projected resistance of domestic demand therefore depending on continued high spending propensity by both consumers and investors, while interest rates may have little scope for a further fall. Political decisions concerning the time table, participants and modalities for the new Euro currency may be "tested" by financial markets, carrying the risk of renewed exchange rate turbulence and of undermining the export strength of hard currency countries. Crucial for developments in Europe is the outlook for Germany. The six leading research institutes and the German Council of Economic Experts agree in their projection of 2½ percent GDP growth in 1997, driven mainly by exports. Given the above-mentioned risks, mainly those related to the demand effects of fiscal retrenchment, the WIFO outlook for Germany is more cautious, with a projected GDP increase of 1¾ percent. Unemployment may continue to rise well into next year before leveling off; the rate of inflation should stay below 2 percent. After its strong swing into deficit following German reunification, the current account is now set to return to near-balance.