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Investors should look beyond the politics

Europe is in better shape than a cursory examination of its politicians might suggest.

Europe is in a political mess. President Chirac and Chancellor Merkel seem determined to block any speed-up on reform of the Common Agricultural Policy before 2012 and stop further concessions in the Doha round of trade liberalization agreements. The prospects of meeting the targets of the Lisbon Agenda to make Europe a world competitor by 2010 look remote.

At the very least, further economic reform in taxation, market deregulation and labour flexibility seem ruled out until at least 2008, when it’s just possible there will be a new set of political leaders on the European stage.

No wonder the euro has dived against the dollar in 2005. It’s not surprising too that many investors dismiss European financial assets. However, I reckon that is a serious mistake.

First, things might not be quite as bad politically as they appear to be. Ironically, in France, the heirs apparent to Chirac, interior minister Nicholas Sarkozy and prime minister Dominique de Villepin have gained in popularity by talking tough over law and order. Indeed, the more reformist Sarkozy is now a clear leader in the public opinion polls for the presidency.

Moreover, the programme of Germany’s grand coalition does aim to rein in the excessive fiscal deficit, even if it postpones further reform.

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