Can this misery be limited to the markets, or will we all be gloomy soon?

Business leaders, like everyone else, do get things wrong. They saw more and more people gabbling on their mobile phones and tapping away at their laptops on the internet, and they thought that the boom would last forever. In America (and to a lesser extent here) they thought that the new dot.com companies would rewrite the rules of business: providing you grew fast enough, it didn't matter if you never made a profit. And in Europe, they thought that the internet would go mobile: that we would use our mobile phones to buy goods and services.

Business leaders, like everyone else, do get things wrong. They saw more and more people gabbling on their mobile phones and tapping away at their laptops on the internet, and they thought that the boom would last forever. In America (and to a lesser extent here) they thought that the new dot.com companies would rewrite the rules of business: providing you grew fast enough, it didn't matter if you never made a profit. And in Europe, they thought that the internet would go mobile: that we would use our mobile phones to buy goods and services.

So American investors piled not only into the dot.coms but also into the companies that made the kit for the communications revolution - everything from laptops to the routers that run the internet. Those companies are now suffering from a sudden decline in demand.

For a while, Europe thought that it could escape. Our excesses were less, well, excessive. Now we know that was too optimistic, for Europe had made a different mistake. Its mistake was not so much to bet on the internet boom as to bet on the mobile boom. So our phone companies bid £22.5bn in the UK alone for third-generation phone licences, more for the rest of Europe: the largest payments for nothing more than pure air that have ever been made in human history. It was great for the taxpayer, and indeed for Gordon Brown, part of whose apparent largesse in the coming pre-election budget will be paid for by the phone auction. But it places a gigantic burden on Europe's hi-tech economy - not just the phone companies themselves, for if BT and Deutsche Telekom and Vodafone have less money, they will spend less on buying equipment from suppliers.

Now, any thoughts that Europe would escape the hi-tech crash have evaporated. During the last few days, there has been a meltdown in the share prices of any company associated, however distantly, with the telecom revolution. At the beginning of the week, the falling share price of Vodafone pushed it into second place behind BP as Europe's most valuable company. Yesterday was the fourth day in a row of share- price falls of Europe's semiconductor, phone equipment and telecom companies.

Sure, share prices always go up and down and then up again - but at the moment, there is a real fear that Europe will experience a telecom crash akin to the property crashes of previous economic cycles. We are still a long way from this now, but somewhere in the dark future, the awful possibility looms that some giant European telecommunications company may go bust.

Fortunately, in economic life, as in other areas of human endeavour, the worst does not usually happen. What matters to all of us in the months ahead is that Europe retains its self-confidence - and for the purposes of this argument, the UK is part of Europe. For the whole world is relying on the European economy to pull it along, in the absence of a similar tug from the US or Japan. The world needs a European boom.

At this point, the discussion stops being one for the business and investment communities, and becomes one for all of us. For if the sort of thing that has been happening in the markets over the last few days goes on much longer, European governments are going to be pushed into the firing line. Instead of preening themselves that Europe is at last likely to experience a year (the first for a decade) when Europe grows faster than America, they will have to confront the possibility that this brief burst of relative prosperity will not last. The wiser European politicians will know that they will get the blame, just as they always got the blame for Continental Europe's persistently high unemployment.

This is of seismic political importance at two levels, the euro and tax. For Continental Europe, there will be a great test of the European Central Bank's savvy. Will it cut interest rates on the basis of fears for the future rather than evidence from the present - as the Bank of England has done? Or will it be more cautious, and risk smothering Europe's economic boom?

If the latter, then that will harden Continental opposition to the euro in the run-up to the introduction of euro coins and notes next January, and it will further undermine any remnants of support for the euro here in the UK. The euro has survived a miserable two years, and the political will to carry on, despite that misery, is enormous. But if it is going to make Europe poorer than it otherwise need be, it is not just the euro itself that is undermined.

As for tax policy, Europe is going to need tax cuts. It will need them not just, as we do here, for political purposes, but to sustain confidence and growth. Our government has cleverly nudged up taxes, amassed a vast surplus, and now proposes to give us back some of our own money in the form of higher public spending and lower taxation. Politically, what Gordon Brown has to do is a no-brainer: take away the money in the first three years and give it back in the fourth.

But on the Continent, it is different. The cuts in taxation, many of which are in the pipeline for two or more years, are needed for an economic purpose, more than a political one. They have to keep growth moving forward. Until this last shake-out in the markets, the tax cuts were almost a luxury; now they have become a necessity.

There is always a time-lag before financial-market worries affect the behaviour of ordinary people. Most people, even in the US where a greater proportion of individuals hold shares directly, don't look at the falling price of their holdings and decide not to have such an expensive holiday or buy the new car. The links are both more subtle and less certain. We are affected by our mood, by our sense of job security, by what our friends are doing, by what feels right.

Very little of the misery confronting the top managers of Europe's high-technology companies has yet to filter through to the community at large. It is the honchos that are under the gun, not the grunts. But it is the grunts that have to save the European economy by carrying on spending. As long as European consumers - helped by lower interest rates and encouraged by tax cuts - keep their self-confidence, the misery of the markets will be contained. Shopping is the new civic virtue - especially if you are buying a new mobile phone.