last year's stunning rally in global stock markets, many
investors thought they knew what to expect in 2010. Among
their bets were that the worst of the credit crisis was over,
that the global economy would continue to expand and that
the dollar would remain weak as economies abroad were
expected to grow faster than that of the United States.
more, if anything was to derail the new bull market, it was
the likelihood that government efforts to jump–start the
global economy would fan the flames of inflation.
move to the present. Less than two months into the new year,
many of these assumptions are already under fire. For
starters, economic turmoil overseas, spearheaded by a
crippling debt crisis in Greece, is leading to new doubts
about the global recovery. Even if Europe doesn't fall into
a double–dip recession, some economists fear that the
region won't fully recover until 2012.
a result, investors have been selling euro–denominated
investments and buying the dollar, raising its value by
around 6 percent against the euro so far this year.
surprising events prove a couple of important points, market
they highlight the risks investors face whenever a strong
consensus forms around any market call. "There's an old
saying that goes, 'if everyone is forecasting something,
then you know it won't come true,'" said Sam Stovall,
chief investment strategist at Standard & Poor's.
often than not, he said, it's the thing that investors don't
see coming that ends up unsettling portfolios. After all, at
the end of 2009, how many people worried that the Greek debt
crisis would stall the new bull?
important, the issues that are scaring the market today
"show that our assumptions about the financial crisis
being over are premature," said Charles de Vaulx, a
portfolio manager at International Value Advisers.
the core of the recent global credit crisis, he noted, was
the dangerous amount of risk that individuals and
corporations assumed by borrowing to spend and invest. And,
he said, "the way this crisis has been addressed around
the world has been through a huge amount of fiscal stimulus."
other words, to keep the economy afloat while the private
sector repaired its balance sheet, governments worldwide
picked up the spending slack. "But the result of all
those actions is that now, suddenly, the focus is on the
creditworthiness of governments themselves," he added.
means the fiscal actions around the globe didn't end the
credit crisis. They merely shifted the focus to another
segment of the economy: the public sector.
this mean that the rally – and the recovery – are over?
Not necessarily, market watchers say. But at the least, it's
a sign the market may have gotten ahead of the underlying
M. Ankrim, senior markets adviser at Russell Investments in
Tacoma, Wash., said that after stocks soared nearly 70
percent between March 9 and Dec. 31, as measured by the
total return of the S.& P. 500, investors were probably
betting on an economic rebound that would be as good as the
downturn was bad.
Mr. Ankrim noted that the markets might have miscalculated
in one crucial area. After suffering through recent troubles
in the housing, equity and job markets, he said, consumers
aren't likely to go back immediately to their free–spending
ways. That, in turn, could slow the economic recovery both
at home and abroad.
would seem a strong argument to bet against the economies of
the United States and Europe and to bet on the much more
rapid growth of emerging markets.
not so fast. Just as the developed economies surprised
investors negatively early this year, they could just as
easily surprise on the upside later in 2010.
the euro. While its decline reveals real problems in Europe,
it could also create a tailwind for some of its markets,
said Michele Gambera, chief economist at Ibbotson Associates.
noted that while Greece faces major budget problems,
economies in Germany, France and the Netherlands are in far
better shape. Yet the fall in the euro caused by Greece's
problems could lift the exports of those healthier countries,
whose products would thus be priced more competitively, he
who are thinking of betting on the emerging markets should
also take note of another surprise this year.
emerging economies are growing must faster than the
developed world – growth in China, for instance, is
projected at nearly 10 percent this year, versus 2.6 percent
in the United States and 1 percent in Europe – many
emerging–market stocks have fared just as poorly as
Western European shares lately.
stocks are down about 7 percent this year, on average, about
the same as European equities. The average Brazilian stock
has lost more than 6 percent.
that's what often happens in markets where investors are
prepared for one scenario, but where another one unfolds.
"If you don't expect something to happen and you
haven't prepared for it," says Mr. Stovall of S.&
P., "that's when panic often sets in."
Paul J. Lim is a senior editor at Money magazine. E–mail:
Pact Failing to Lift the E.U. on Global Stage
Three months after the European Union introduced a new rule
book that was supposed to elevate its status on the global
stage, an awkward question is unavoidably being asked within
the bloc: Has the Lisbon Treaty actually made things worse?
agreement finally became law in December at the end of an
eight–year battle to reform Europe's ramshackle structures
and to invest the world's largest trading bloc with
equivalent diplomatic weight for its 27 member nations.
during the treaty's brief life thus far, confusion about the
bloc's leadership has deepened, President Barack Obama has
decided not to attend a European summit meeting, a series of
turf wars has broken out, and there has been criticism of
the low profile of the Union's first full–time president,
Herman Van Rompuy, and its new foreign policy chief,
Monday, the infighting worsened with news of a written
complaint to Ms. Ashton from the Swedish foreign minister,
Carl Bildt, about the way that the bloc's new ambassador to
Washington, João Vale de Almeida, was appointed.
while the Union may use some new powers under the Lisbon
Treaty to deal with the Greek debt crisis, the treaty did
not help avert it. On Monday, the Greek deputy prime
minister, Theodoros Pangalos, said E.U. leaders were "not
up to the scale of the task" in dealing with the
crisis, The Associated Press reported.
some see the problems as predictable – and point out that
it took the new U.S. administration many months to get
organized – most observers accept that the Lisbon
agreement got off to a bad start. The question is whether it
is suffering growing pains or symptoms of something worse.
Klau, senior political analyst at the European Council on
Foreign Relations, argues that like "any organization
restructuring its management" the Union is suffering
"a period of turmoil, tension, some uncertainty and
some loss of efficiency."
Ron Asmus, executive director of the Transatlantic Center at
the German Marshall Fund of the United States, believes that
new players, including Ms. Ashton, must assert themselves,
and fast. "If there is a vacuum of power, someone fills
it," said Mr. Asmus, a former U.S. deputy assistant
secretary of state for Europe, who supports a greater global
role for the Union. "The institutions and new people
have to fill that vacuum fairly quickly."
Asmus said U.S. policymakers were asking whether the Union
was serious about its global ambitions. "People argue 'if
they wanted to play that role wouldn't they be handling
things differently?"' he said. "'If it were a
priority for Europe to boost its presence on the global
stage, would they not choose their leaders differently and
work harder to create more clarity?"'
Lisbon Treaty was intended to revamp a system under which
each of the E.U. nations held the presidency of the bloc for
six months on a rotating basis. It created a new full–time
presidency and a more powerful foreign policy chief to be
reinforced by a diplomatic service.
because it was unclear before December exactly when the
treaty would come into force, Spain prepared for a full
stint as E.U. president and, said Antonio Missiroli,
director of studies at the European Policy Center in
Brussels, "is not particularly happy at having to hand
over everything to new bodies."
efforts to retain a high profile have been damaging because
they have undermined one of the Lisbon pact's main selling
points: streamlining European leadership.
determination to hold an E.U.–U.S. summit meeting in
Madrid have backfired and Spanish attempts to grab the
limelight illustrate one of the flaws in the treaty, which
does not completely end the rotating presidency.
issues from the environment to social affairs, ministerial
meetings will continue to be led by politicians from the
rotating presidency. However, the duties of the prime
minister and foreign minister are mostly handled by Mr. Van
Rompuy or Ms. Ashton.
problem ought to diminish in July, when Belgium assumes the
rotating presidency, because Brussels says it will play a
lower–key role than Spain. Nevertheless, prime ministers
or foreign ministers from countries holding future rotating
E.U. presidencies may not take kindly to being sidelined.
the Lisbon Treaty is vague on many issues – like who is in
charge of international policy on climate change – leaving
the new personalities to establish lines of demarcation.
Ashton's job is unique because she is both a vice president
of the European Commission, the bloc's executive branch, and
a representative of the European Council, where national
idea behind her appointment was to put all of the Union's
foreign policy financing – once in the hands of the
commission – behind strategic policy goals agreed to by
national governments in the council.
that has sparked a fierce turf war, as the commission
battles to retain as many powers as possible.
the same time, the regulations setting up the new E.U.
diplomatic service – or External Action Service – have
yet to be framed, prompting intense in–fighting over the
relative roles of the European Commission, which has a
network of foreign representatives, other E.U. officials and
diplomats from national governments.
announcement last week that Mr. Vale de Almeida – until
recently the closest aide to José Manuel Barroso, president
of the European Commission – will take up the job of E.U.
representative in Washington was seen by some as a pre–emptive
strike by the commission.
the meantime, Ms. Ashton has been operating with a skeleton
team. The speed and visibility of the Union's response to
the earthquake in Haiti was criticized publicly by France's
Europe minister, Pierre Lellouche. At one press conference,
Ms. Ashton; the Spanish foreign minister, Miguel Ángel
Moratinos; and the former European commissioner for
development, Karel De Gucht, contradicted one another's
figures on how much the Union was spending in Haiti.
Mr. Van Rompuy has been trying to mark out economic policy,
traditionally a preserve of the commission, as his main
priority. That has caused tension with Mr. Barroso.
Van Rompuy is also now arguing for a seat on the Group of
20, in addition to Mr. Barroso's G–20 seat, even though
the United States believes that Europeans are
always have that kind of gray zone where people have to lean
to know where their limits are," a European diplomat
said, speaking on condition of anonymity because of the
sensitivity of the subject.
the same time, the new powers of the European Parliament
look certain to complicate the making of decisions on the
international stage. Earlier this month, Washington was
rebuffed by the Parliament, which – emboldened by its new
Lisbon Treaty powers – voted down the so–called Swift
agreement allowing the United States access to information
on bank transfers.
Lisbon, the deputies will have the power to reject trade
deals and have a powerful say on agriculture legislation. Mr.
Missiroli said that the Parliament was growing into a role
similar to that of Congress in the United States.
of the treaty argue that it was never going to deliver
instant results. "It is difficult," said Charles
Grant, director of the Center for European Reform, "to
write off what has not been built," referring the new
European diplomatic corps.
wars are a characteristic of bureaucracies since 10,000
years B.C.," he said. "Bureaucracies fight other
bureaucracies. Everyone knew this would happen."
consensus is that it will take anything from one to five
years for the system to start delivering.
may be that we will have to sing a requiem of broken hopes
in two years' time," Mr. Klau said, "but it is
certainly too early now."