Investors are banking on a new government in Germany later this year to boost corporate competitiveness but there is little expectation that a wave of reforms will spill over into France and Italy.
Although recent polls have shown support for Germany's CDU/CSU conservatives dipping, leading investors are still expecting the grouping under Christian Democrat leader Angela Merkel to win a September election and form a coalition with the Free Democrats.
The conservatives have pledged to cut corporate tax, which is among the highest in Europe, and embark on a programme of loosening Germany's rigid labour laws.
That should attract investor attention to German equities, which have already been popular this year. The DAX index is up more than 14 per cent so far this year.
"It will be a big boost for business sentiment and that will help - definitely moving the country in the right direction," said Andrew Bosomworth, a senior vice president with US bond fund PIMCO in Munich.
In the short-term, investment strategists like Richard Batty at Standard Life Investments see a boost for equities in companies most likely to benefit from the corporate tax cut. He estimates, for example, that the likes of Deutsche Boerse and Commerzbank could see a three per cent-plus rise in earnings as a result.
Others, such as Adidas, would see a smaller gain - less than one per cent - because of differences in tax policy.
The story for bonds could be mixed. Plans to increase value added tax are likely to improve Germany's fiscal accounts, which is good for bonds because it cuts supply needs. But it could also increase inflation, which is bad for bonds.
That could trigger a number of trading plays for investors across the eurozone, including demand for inflation-linked euro bonds.
Germany does need a fillip. The once vibrant economy is expected to grow at just one per cent this year and unemployment hit a post-war record above five million earlier this year.
There are, however, signs that things may be getting better. Unemployment fell for the fourth straight month in July and Economy Minister Wolfgang Clement predicted it will continue to decline at a faster pace over coming months. Investment bank Merrill Lynch also notes that Germany keeps surprising financial markets.
"Pessimism about the German economy may be rather overdone," it said in a note. "In the first half of this year Germany delivered more upside surprises on activity than the US, Japan, France, Italy or the UK."
Analysts have credited Social Democrat Chancellor Gerhard Schroeder for making a start on freeing up the labour market, but they would still see his Social Democratic Party's return to office as a risk to their expectations.
In a recent note, Dresdner Kleinwort Wasserstein outlined various scenarios from an election and their impact on investment expectations.
Both scenarios that saw the SDP in government - either having been re-elected or in a "grand coalition" with the conservatives - were seen as a setback for equities, albeit in the latter case a modest one.
Investors, meanwhile, may be hoping for a burst of German reforms to boost competitiveness, but they are not expecting any widespread free market contagion to spread across the rest of the main eurozone economies.
"We would favour Germany doing well and probably better than France and certainly better than Italy... over a three to four year view," said Stewart Robertson, UK and European economist at Morley Fund Management. Morley has already been taking positions in German investments in line with expectations of improvements.
Investors suggested the main spill over to France and Italy could be as much from having larger growth in eurozone partner Germany as in any attempt to adopt similar labour reforms. The horizon for any such knock-on effect would be very long term.
Some do point to the likelihood that French Interior Minister Nicolas Sarkozy, who has a reputation as an energetic free marketeer, will run for president as a sign that France could jump on a reform bandwagon.
But the presidential election is not until 2007 and a certain scepticism about Europe's general aversion to the Anglo-Saxon economic model remains.
"Progress in Europe is always going to be very, very slow," said Giorgio Radaelli, chief strategist at wealth manager BSI. "(Europeans) prefer to be relatively poorer for the sake of security in jobs and pensions, and that is not going to change."