Europe's jaw-dropping run

European markets' performance - at Moneyweek.com - the best of the week's international financial media.

The performance of European shares this year has been "jaw-dropping", says David Bowers of Merrill Lynch. European manufacturing is heading into recession and two founder members of the European Union have rejected the new EU Constitution. Yet stocks have risen by almost 10% in 2005, and the pan-European FTSE Eurofirst 300 index and Paris and Frankfurt hit a three-year high this week.

Markets have been bolstered by the sliding euro, which boosts European exporters, while valuations have also helped: Franz Wenzel of Axa Investments notes that European stocks are about 20% below their average valuation of the past 40 years. Investors are also hoping that political upheaval could help stimulate more restructuring and reform. The prospect of political integration has now receded, leaving Europe free to focus its energies on "long overdue restructuring", says Stephen Roach of Morgan Stanley. Is this likely, and are there other reasons to expect the rally to endure?

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