Bad for the portfolio ...

This was supposed to be the year of the Big Splash for investors in Europe, the year of promise and performance, when European companies, buoyed by a single currency, moved full throttle across the global investment pond.

But 1999 is, instead, shaping up more like the year of the Big Drip, the year of disappointment and inertia.

In 1999, European equities were supposed to ride to the top of global markets, pulled ahead by the European Union's new currency, the euro, which arrived with great fanfare Jan. 1.

The euro was supposed to boost efficiency and profits for European companies and fiscal responsibility for state budgets.

The outlook was rosy, especially with European interest rates heading south. Euro-companies were exporting more and rushing into new mergers and consolidations.

But the reality has been a splash of cold water in the face. European stocks trade in the doldrums, says Bill Rocco, an analyst with information-firm Morningstar Inc., Chicago.

And European-linked mutual funds are among the worst performers in global securities markets. (See chart, right.)

The euro itself, a symbol of the promise of monetary union, is slowly sinking among global currencies. From the start of the year through May, the euro lost some 12 percent of its value against the dollar.

Now, with the end of the war in Kosovo, there is talk that Europe's woes may be lifting.

The euro even turned up slightly, following the peace accord.

Does that mean that European equities markets are ready to rise to the surface again?

Don't count on it, say many experts.

European companies can be expected to show slight improvements in sales and earnings - especially construction and defense firms that might benefit from the cost of both war and peace in Kosovo.

And the stock markets of nations closest to Kosovo - Greece and Italy - are expected to benefit most.

But the broader European equities market will probably not get much of a kick from a peace settlement because the war was not much of a problem to begin with.

Europe's problems go far beyond even the slumping euro, says Cynthia Latta, an economist with Standard & Poor's DRI in Lexington, Mass.

The euro "is not the cause of Europe's tepid growth," she says. If anything, it reflects the weakness of slow-growing European national economies.

The real culprits, she says, are systemic to the European business and economic culture, including rigid work rules in many nations, stodgy bureaucracies, expensive social-welfare programs, and antiquated and slow-moving corporate structures.

If anything, the slumping euro "has probably helped boost exports," Ms. Latta says, by making them competitive with more costly dollar-based products.

Other positive factors stemming from the euro:

1. The currency is helping to foster greater cross-border mergers and acquisitions.

"The merger activity has only really begun, and should intensify during the next few years," says Inigo Aguirre, who follows the euro for Value Line, a financial services and information firm in New York.

The attempted takeover of Telecom Italia by Deutsche Telekom recently was only the most prominent example. (Telecom Italia was eventually won over by another Italian conglomerate: Olivetti.) But Mr. Aguirre expects more mergers, especially in the red-hot telecommunications and consumer-goods sectors.

2. European-based investment managers are thinking more in terms of regional and cross-border growth, than just focusing on companies within their home markets. This will help create a truly European-based business culture, Aguirre says.

3. The euro has given a boost to the European bond market. In the first quarter of 1999, the euro was the "currency of choice for international debt markets," says Aguirre. The euro was 40 percent of world bond issuance.

In the past, most European companies have sought financing through banks, rather than debt issuance. Now, more and more firms will issue euro-based bonds, he says.

Mr. Aguirre also expects that the euro will eventually settle into a consistent trading range, and then gradually begin to rise in value in the months ahead.

But in terms of upward performance before the euro hits its stride as a global currency, "we are talking about four or five years," he says.

European economic officials also believe the euro will continue to climb in value, in part because of expected low inflation in most European nations in the months ahead.

At a recent press conference, European Central Bank head Wim Duisenberg said that the euro has a "clear potential for a stronger external value."

Still, for now, such expectations are of little comfort for those who invest in European-based mutual funds. Among all global markets, European funds continue to lag.

While Latin American and Asian (Pacific) markets are up around 21 percent and 22 percent respectively, Europe is down about 2 percent, according to fund-tracker Lipper Inc.

"I'm not generally optimistic about any turnaround for European funds," says Mr. Rocco of Morningstar.

He adds that investors are probably better off buying into a solid international fund right now - thus providing diverse exposure to foreign markets, including, but not restricted to, Europe.

"European funds will eventually come back," Rocco says. "But until valuations look more attractive, there's going to be a wait."

The future of European funds may also hinge on growth. DRI sees overall economic growth among the major European nations at about 1.7 percent this year, rising modestly to 2.1 percent next year. That is well below US growth, which is currently running above 3 percent.

Merrill Lynch, which also tracks Europe, sees continent-wide growth to be about 2 percent this year, with a risk, to the downside.

Looking ahead, Merrill Lynch sees growth barely rising in 2000. In Germany, growth will climb from about 1.3 percent this year to 2.2 percent next year; France from 2.1 percent in 1999 to 2.4 percent; Italy from 1.3 percent this year to 2.3 percent next year.

Exchange rates

Currency charts are always a bit confusing at first glance, even for seasoned travelers, so here's a brief guided tour. These numbers answer the question: "How many (units of foreign currency) can I buy with one, US buck?" The first column tells you what the number was last week. The second column answers the same question for the end of last year.

This table shows the weakening of currencies for the 11 European nations that adopted the euro at the beginning of this year.

US dollar equivalent

June 15 Dec. 31

Austria (schilling) 13.20 11.79

Belgium* (franc) 38.68 34.59

Finland (markka) 5.70 5.10

France (franc) 6.29 5.62

Germany (mark) 1.88 1.68

Ireland (punt) 0.76 0.67

Italy (lira) 1,856.80 1,660.35

Netherlands (guilder) 2.11 1.89

Portugal (escudo) 192.25 171.88

Spain (peseta) 159.56 142.60

Euro 0.96 0.85

*Luxemburg's currency value is equal to Belgium's franc. WHITNEY DODDS WOODRUFF