Europe Misses Its Big Moment.(European economic conditions and policies)(Brief Article)(Statistical Data Included)

On the face of it, this should be Europe's time. It has so far avoided Enron-style bankruptcies or scandals. The stock bubble was never quite as overinflated in Europe as in America. And the electoral swing to the right in Europe means that market-friendly economic reform is back on the agenda. So you would expect much of the money now fleeing Wall Street to cross the Atlantic.

But it's not. The euro did climb briefly above the symbolically important marker of parity with the dollar--and still stands around 20 percent above its historic low. European markets, however, have slavishly followed Wall Street's tumble. Shares in Frankfurt and London are around 40 percent below their 2000 peak, while French shares have halved in value from their record high. What's going on here?

Some investor skepticism stems from the poor short-term economic outlook for Europe. Economists are lowering forecasts for euro-zone growth, following weak consumer- and business-sentiment surveys--even as the European Central Bank continues to mutter darkly about the threat of inflation. The export-driven German economy--Europe's largest--looks especially vulnerable to any further rise in the euro, or an extended slowdown in the United States. More fundamentally, investors remain unconvinced that Europe is serious about reform.

France, Italy, the Netherlands, Denmark and Portugal have all recently elected right-of-center governments on manifestoes promising substantial tax cuts, privatization and pension- and labor-market reform. Germany looks set to follow suit in September elections: the Christian Democrat, Edmund Stoiber, is leading Chancellor Gerhard Schroder in the polls. But the advance of the right is not all it seems.

With the possible exception of the Berlusconi administration in Italy, most of the new governments are not proposing radical changes. French President Jacques Chirac and Stoiber are, at best, timid supporters of free-market reforms. At worst, they will resist many of the further European Union moves to liberalize the European economy. The broad EU agenda now includes measures to accelerate the integration of European capital markets, reduce the costs of cross-border trading, establish a single market in securities by 2005, create common European rules for takeovers and foster competition between Europe's exchanges and investment banks.

The most contentious issue is pension reform. A shift to private pensions across the continent is crucial to the ...