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The Rating Game: U.S. vs. Europe

With rising interest rates in Europe and no sign of a near-term change in interest rates in the U.S., is the current U.S. economic picture a sign of what’s to come for Europe?

As CNBC’s Steve Liesman explained, since 1999, monetary policy at the European Central Bank and at the U.S. Federal Reserve has essentially moved in tandem. But a year after the Federal Reserve stopped raising rates, the ECB rate hikes continue. Meanwhile, U.S. growth has slowed for five consecutive quarters while growth in Europe has only recently shown signs of deceleration, peaking at a 4% growth rate in the second quarter of 2006.

Though European stocks continue to outperform U.S. stocks, the macroeconomic forecasts for both sides of the Atlantic paint a different picture. GDP growth forecasts for Europe range from 2.3% to 2.9% in 2007, roughly 0.2% behind U.S. growth forecasts. In 2008, Europe is seen growing anywhere from 1.8% to 2.8%, compared to a 2.75% to 3.0% range in the U.S.

On the inflation side, analysts expect Europe to be contained through 2007, with a possible uptick next year.

So, if the tide rises in Europe will U.S. stocks be lifted? With attractive price-to-earnings ratios and yields, European stocks remain in favor, according to Alec Young, a Standard & Poor’s equity research analyst. But six months to a year from now, a change in macro fundamentals could spur a change in portfolios.