Europe, the euro and sterling
The euroland economy stinks of stagflation. Its politicians are faltering on reform amid electoral paranoia, and the threat to jobs from the global slowdown. That means, combined with the European Central Bank's confused interest-rate policy, that the outlook for capital flows into mainland Europe remains poor. I reckon that will continue to undermine the euro. The place to be in Europe is the UK, where I expect sterling will hold firm, despite the risk of possible early entry into the single-currency system.
With parliamentary elections taking place in half of Europe's states over the next 18 months, the focus is on meeting social obligations rather than economic reform. The tone is set by France, which has both presidential and parliamentary votes to cope with. The Jospin government has made it clear that it will do nothing to undermine its popularity (for which, read: prejudice the chances of the prime minister acceding to the presidency!). The practical consequence is a raft of new measures designed to protect French workers' rights in the face of the global slowdown.
But it's not just France that has pulled the plug on structural reform for the time being. Germany has offered Paris its full support in blocking accelerated electricity market deregulation, while watering down its own pension reform.