Euroland's fatal fiscal weakness

Investors' European equity valuations are pricing in a successful Emu. Markets believe the euro will be strong and corporate profitability will stay high.

There are good short-term arguments for expecting the euro to start off strong. First is the critical mass argument. Until now, European countries have accounted for a bigger share of world savings and trade than the volume of transactions in their currencies reflects. But the advent of a single European currency will generate a "natural" demand for euro transactions that will make it strong. Once that happens, central bankers of the world will want to swap into euros some of their international reserves, where, at two-thirds of the world total, the US dollar is over-represented.

Then there is the economic cycle. Whereas up to now, the peripheral economies in Europe - Scandinavia, Ireland, the UK and southern Europe - have been growing at 3% to 5% a...