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European Stocks' Dismal Year

Outlook: After a steep slide, few experts see a lasting rebound soon as investors refocus on structural problems in the economy.


BERLIN — Battered and bleak, European stock markets are among the world's worst performers this year, and few analysts see much hope of a sustained turnaround soon.

The view across Europe's economic landscape is sobering. A Mideast war looms. Consumer confidence has plunged. Technology stocks have suffered even bigger losses than U.S. tech shares. Telecommunications companies need multibillion-dollar bailouts.

What's more, the economic magic long promised by the European Union and its move to a single currency is belied by statistics in countries such as Germany, where the economy is growing at a meager 1.4% real rate this year, the unemployment rate is nearly 10%, and neither the unions nor the government is willing to trim costly social and welfare programs.

Stock markets have fallen steeply around the globe, but Europe's slide has been markedly nasty. Since the beginning of the year, Germany's blue-chip stock index is down 44% in local currency terms. The Swedish market has fallen 46%, the French market is down 39% and the Spanish and Italian markets both are off 35%.

By contrast, the U.S. blue-chip Standard & Poor's 500 index is down 26%. Japan's Nikkei-225 index is down 13%. European markets suffered bigger losses than the U.S. S&P 500 in 2001 as well.

What to do? Many European market analysts don't know. They grimace. They sneer. They scratch their heads.

Although share prices are expected to rally today on the heels of Wall Street's snap-back on Tuesday, many experts don't see fuel for a lasting rebound.

"The mood is very gloomy at the moment," said Friedrich Heinemann, a researcher at the Mannheim European Center for Economic Research. "The European economy has been dependent on exports. It is tied to the locomotive of the U.S., but with the U.S. down, there's no energy pulling the European economy anymore. There's no internal demand."

The effect of the U.S. economy and the peaks and valleys of its financial markets are seldom underestimated in Europe. Roughly one-fifth of corporate Europe's revenues come from the U.S., according to a recent survey in the Economist.

The slump on Wall Street, and the possibility of a war with Iraq that could send oil prices soaring, are again reminding Europe that its fortunes remain tied to larger spheres.

Some European officials have tried to put the best face on stocks' dismal showing this year, saying it has to be viewed in the context of troubled markets worldwide.

Others see deeper problems. "People don't trust the markets anymore, they don't trust the products, they don't trust the companies," said Justin Urquhart Stewart, director of 7 Investment Management in London.

"What we're looking at now is the detritus of 20 years of bull markets, corporate greed and mishandling of funds," he said.

Last week, Germany said it will shut down its tech-stock market--the Neuer Markt--next year. When it was created in 1997, the Neuer was supposed to be Europe's rival to the U.S. Nasdaq market.

Instead, the Neuer Markt's shares have lost 96% of their value from the market's peak in 2000. That is far worse than the Nasdaq's 76% drop from its 2000 peak.

A rebound in the euro currency's value against the dollar earlier this year stoked hopes that Europe was becoming more alluring to global investors. But since late June the euro has stalled out.

Even though key measures of stock valuation show European markets now are cheaper than the U.S. market, investors again are focused on long-standing structural problems in the economy that European governments are reluctant to address for fear of angering unions and pensioners.

Despite a decade of calls for labor market reforms, the major economies of Germany and Italy are shackled by generous welfare and social benefits that eat away at the gross domestic product. France has made some reforms in recent years, but analysts are troubled by recent trends favoring unions.

Germany is the extreme case of what's troubling Europe. With a population of 82 million, Germany is Europe's biggest economy, comprising one-third of the euro zone. But it is anemic. Chancellor Gerhard Schroeder--who won a tough reelection last month with union backing--is showing no indications that he'll introduce significant economic reforms. Retail sales are down from a year ago and 4 million people are unemployed.

"We are quite pessimistic," said Christoph Hausen, an economist at Commerzbank in Frankfurt. "We have these problems and we're still struggling after 12 years with the unification of east and west Germany."

Many analysts also see hopes fading that more capital will become available to European entrepreneurs through equity markets in the longer run.

Europeans traditionally have been more timid than Americans in playing the stock market. They invest a much lower percentage of their savings and pensions in equities. The boom of the late 1990s, however, enticed many Europeans to enter the bourse.

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