Analysts point to Germany’s strengthening economy as one factor bolstering the Eurozone outlook. In the second quarter, Germany posted a 0.9-percent GDP increase, which brought the annualized unadjusted growth rate in the region to 2.4 percent. That reading was slightly above analysts’ expectations. Healthy domestic demand was viewed as the main factor behind the acceleration.

“European growth picked up, spurred by global growth and the World Cup,” says Tim Mazanec, senior FX strategist at Investor’s Bank & Trust.

“The Eurozone is recovering, enabling the central bank to raise rates,” adds Ideaglobal’s Powell.

Ideaglobal economists forecast a 2.4 percent overall GDP rate for 2006 and a 1.8-percent reading for 2007. Moody’s forecasts a 2.3-percent GDP rate for 2006 and a 2.0-percent rate for 2007.

Another factor that should keep the domestic demand strong in the Eurozone is Germany’s plan to increase its sales tax.

“In the second half of the year, consumer spending may increase in anticipation of that tax hike,” Mazanec says. Overall, Moody’s Guest says, “The Eurozone economy is in the best shape it’s been in since the dot-com crash. Employment is picking up, corporate balance sheets are healthy, and interest rates are still relatively low.”

While the major European stock indices have retreated from their highs of the year, European stock markets have still outperformed the U.S., Guest says.

Powell says the improved performance in European stock markets this year is a reflection of increased economic activity in the Eurozone.