Early in the Year, and Already Surprised

After 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.

What's 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.

Now 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.

As 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.

The surprising events prove a couple of important points, market strategists say:

First, 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.

More 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?

More 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.

At 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."

In 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.

That 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.

Does 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 economy.

Ernest 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.

But 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.

This 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.

But 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.

Consider 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.

He 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 said.

Investors who are thinking of betting on the emerging markets should also take note of another surprise this year.

Although 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.

Chinese 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.

But 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: fund@nytimes.com.

Lisbon Pact Failing to Lift the E.U. on Global Stage

Brussels.– 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?

The 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.

But 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, Catherine Ashton.

On 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.

And, 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.

Though 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.

Thomas 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."

But 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."

Mr. 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?"'

The 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.

But 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."

Spanish 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.

Spain's 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.

On 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.

The 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.

Meanwhile, 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.

Ms. 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 governments meet.

The 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.

But that has sparked a fierce turf war, as the commission battles to retain as many powers as possible.

At 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.

The 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.

In 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.

Meanwhile, 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.

Mr. 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 overrepresented.

"You 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.

At 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.

Under 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.

Supporters 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.

"Turf wars are a characteristic of bureaucracies since 10,000 years B.C.," he said. "Bureaucracies fight other bureaucracies. Everyone knew this would happen."

The consensus is that it will take anything from one to five years for the system to start delivering.

"It 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."