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Orders to US factories hit a two-year high in July while last week&#39s American Institute for Supply Management&#39s index of service sector activity delivered its highest reading in six years.

All this good news is supporting the market but still enough concerns emerge each week to remind investors that they should not hope for too much this year.

At the forefront of economic news delivering mixed signals last week were the announcements from the European Central Bank and our own Bank of England that interest rates would remain on hold.

No surprise there, you may think, but ECB vice-president Lucas Papademos, who stood in for Wim Duisenberg, took the opportunity to lambast the French and German governments for flouting the stabilisation pact.

While this might appear to hold the fascination of watching paint dry, the importance of the eurozone&#39s two biggest economies mounting budget deficits cannot be ignored.

At the very least, it underscores the problems attached to trying to maintain a single currency across a variety of sovereign states, each of which will have its own – and very specific – priorities.

In the case of France and Germany, the shared imperative is the need to regenerate their respective economies – both hard hit by the rise in the euro. Both would doubtless have welcomed a further reduction by the ECB from the admittedly record low of 2 per cent. But the Central Bank&#39s task is to look after the interests of all member states, not just those suffering a little local difficulty.

France has raised the stakes further by announcing another cut in income tax. This seems certain to guarantee that our nearest neighbours on the continent will break the European Union&#39s budget deficit rules for next year – the third successive year in which this will have taken place.

This move is no more than fulfilling President Jacques Chirac&#39s election pledge to cut personal taxes by 30 per cent over five years but it is being enacted against the background of a deficit that already exceeds the limits laid down when the euro was first established.

As it happens, EU finance ministers will be getting together for a chinwag in the town of Stresa in Italy this week. With Sweden due to vote on whether to join the single currency almost immediately after that meeting and other eurozone members less constrained by budgetary issues likely to be vocal in their concerns over French and German behaviour, it promises to be a lively meeting.

For investors in Europe, this year has not been half-bad. Both the headline indices for France and Germany hit new highs for this year during the past week. France&#39s CAC40 has risen by over 11 per cent since the beginning of the year while the German DAX30 is up by an impressive 27 per cent. While Britain&#39s FTSE 100 index is up by nearly 8 per cent since the start of 2003, it is worth remembering that the euro, despite recent weakening, is still 6 per cent higher against sterling over the same period, virtually eliminating this gain for European investors.

The outlook clearly depends upon Europe&#39s ability to turn round the ailing economies of Germany, France and Italy, but perversely this appears to hang upon the measures they are introducing which is bringing them into conflict with other member states.

European shares do at least have the merit of not looking overly expensive when compared to others on the world stage, which probably justifies an in-line weighting for most benchmarks. The fact remains, though, that Europe&#39s most radical experiment – creating one currency to embrace a dozen or more sovereign states – is under threat.

Trawling through the other financial news of the past seven days or so, it is hard not to comment on the Royal & Sun Alliance rights issue, which seems to have brought to an end a period of outperformance for the shares. The fact that virtually all the £1bn it is planning to raise is already earmarked to address the problems of the past shows the problems faced by European insurers. R&SA may have a fresh hand on the tiller but for the time being it, and much of the rest of this sector for that matter, is probably best avoided.

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