Prophesies Made in Davos Don\'t Always Come True

You’re going to be hearing a lot of predictions over the next several days. Be leery.

Some of the world’s biggest names in business and politics are descending on the snowy enclave that is Davos, Switzerland, for the annual meeting of the World Economic Forum, which begins Tuesday evening. They are there to talk big ideas â€" and perhaps more important, to rub elbows and do business over Champagne and cheese fondue. (Yes, I’ll be there, too.)

Invariably, there will be panel discussions filled with provocative prognostications about the state of the economy, politics, technology and an assortment of other issues. But if you’re looking to the Alps for the wisdom of crowds, the wisdom of this crowd of the global elite may not be the most accurate.

The predictions that have emanated from Davos always have a ring of plausibility to them, in part because of the credibility of the speakers. But all too often they fall short.

Here is just one example: Bill Gates, the co-founder of icrosoft and global philanthropist, has made the pilgrimage to the Alps for more than a decade and made a series of somewhat famous â€" or infamous â€" predictions.

When asked about Google back in 2003, he didn’t have an upbeat outlook on the company’s future nor its founders.

“These Google guys, they want to be billionaires and rock stars and go to conferences and all that,” Mr. Gates said. “Let us see if they still want to run the business in two to three years.” (Larry Page, a co-founder, is the chief executive.)

And the next year, Mr. Gates followed up that prediction with this marvel of what the future would look like: “Two years from now, spam will be resolved.” (If only.)

Broader predictions about the economy have been even more miss than hit. In 2011, ahead of what turned into a full-blown economic crisis in Europe that threatened the existence of the euro, Christine Lagarde, the French minister of finance at the time, declared: “I think the euro zone! has turned the corner. Let’s not short Europe and let’s not short the euro zone.” (If you had bet against the euro zone then, you would have made a small fortune.)

And it is not just recent predictions that have been, for lack of a less polite word, off. Abby Joseph Cohen, the longtime Goldman Sachs market analyst, announced in Davos in 2000, at the height of the technology bubble, that she expected a big year for stocks, with the Standard & Poor’s 500-stock index gaining 10 percent. Of course, the S.& P. 500 did nearly the opposite, falling 9.1 percent that year, followed by two more years of declines that totaled a 34 percent drop. (In fairness, Ms. Cohen revised her prognosis several months after her trip to Davos and told her clients to sell stocks.)

How’s this for an anti-prescient panel In 2001, the World Economic Forum put together a panel on “the shape of the 21st century corporation.” Among the headliners were Ken Lay, the chief executive of Enron; Carleton S. Fiorina, th chief executive of Hewlett-Packard; and David H. Komansky, the chief executive of Merrill Lynch. (We know how their tenures turned out.)

In 2006, about a year and half before the credit crisis was upon us, Martin Halusa, the chief executive of Apax Partners, declared that he expected to see a private equity fund of $100 billion within a decade.

News flash: private equity funds have become smaller, not bigger. He has three years to see his prediction come true, so stay tuned.

And then there was Davos 2008, about eight months before Lehman Brothers collapsed and the global economy spiraled downward. What did C. Fred Bergsten, senior fellow and director emeritus of the Peter G. Peterson Institute for International Economics in Washington, have to say about the state of the economy “It is inconceivable â€" repeat, inconceivable â€" to get a world recession.” (A year later, he defended his words, saying, “through the first three quarters of last year, my prediction was correct.”! )

T! hat’s not to say every prediction said in Davos is wrong. Nouriel Roubini, known as Dr. Doom, announced in Davos in 2007, “The risk of some crisis happening is rising.” And while he turned out to be right, he was roundly criticized for being too pessimistic by Michael Lewis, who wrote a critical piece about doom and gloom of some academics. His piece was titled, “Davos Is for Wimps, Ninnies, Pointless Skeptics.”

Did Mr. Roubini really know the full extent of the crisis brewing Of course not. But directionally, he was correct.

Having said that, he was back playing Dr. Doom last year in Davos and predicted that Greece would default within a year and that Portugal was next. George Soros, the billionaire investor, was also sounding the same alarm about Greece’s eventual default. “The odds are in that direction,” Mr. Soros said. (That hasn’t come true â€" at least not yet.)

That same year, Mario Draghi, the president of the European Central Bank, had it right: “We know for sre that we have avoided a major, major credit crunch, a major funding crisis.” (Of course, he could help control the outcome.)

What about the wisdom of the collective crowd, not just the individual predictions If you’re looking for the mood of the corner office â€" even if it is a fleeting mood â€" the annual meeting of the World Economic Forum is actually a pretty good litmus test.

PricewaterhouseCoopers does a survey of many of the participants that it reveals on the first night of the conference. While the results would not have helped investors in 2008 (the group was still quite bullish), listening to the results in 2009, 2010 and even 2011, the view was generally on target.

But, of course, it is the individual predictions that receive the most attention. I remember paying particular attention to this one: In 2008, the futurists and technology forecasters Peter Schwartz, a co-founder of the Global Business Network, and Paul Saffo of Stanford University declared that they exp! ected the! publication of newspapers to end by 2014. Luckily, the prediction track record in Davos isn’t great.

Atari\'s U.S. Division Files for Bankruptcy, Hoping for a Sale

Nearly three decades after Atari closed the doors on its first iteration, the videogame pioneer is attempting another reinvention. It just had to file for bankruptcy first.

The company’s United States subsidiary, Atari Interactive, filed for Chapter 11 protection on Monday as part of an effort to cleave itself from its French parent, Atari S.A.

The move, made in the Southern District of New York, is meant to pave the way for a sale of the division, including its distinctive logo and rights to staples of many a Generation X member’s childhood: Pong, Asteroids and Centipede, among other games. The company will continue to operate normally during the bankruptcy case.

If successful, the move will mark the latest chapter for a company that introduced videogames to millions by letting them thwacking a crude virtual ball back and forth across a television screen.

Atari first faltered during the bursting of the videogame bubble in 1983 and has made periodic attempts to remake itself sice then. Its latest phase is more in keeping with the times: The company now focuses on producing mobile and online games, including remakes of its top titles for iOS and Android devices.

Beginning in 2000, the company began its absorption into Infogrames, a French videogame producer that in 2008 adopted the name of its prominent subsidiary. But Atari S.A., as the newly rechristened company is now known, has struggled financially. Several weeks ago, the company lost access to new money from its primary lender, BlueBay Asset Management.

Atari S.A.’s shares have tumbled nearly 49 percent over the past 12 months, closing on Monday at just 86 euro cents.

Now Atari is seeking to sell its American operations through what is known as a 363 sale, allowing a buyer to gain control of the company’s core assets free of any liabilities.

“In light of the current situation with BlueBay, we have decided to! take what we think is the best decision to protect the company and its shareholders,” Jim Wilson, Atari S.A.’s chief executive, said in a statement. “Through these ongoing procedures, and especially the auction process in the U.S., we will seek to maximize the proceeds in the best interest of the company and all of its shareholders.”

In a court filing, Atari listed having less than $50 million in assets and less than $500,000 in liabilities. It has obtained about $5.25 million in bankruptcy financing from Tenor Capital Management.

Atari Interactive's bankruptcy filing by

China Looks to Aerospace in a Bid for Growth

TIANJIN, China â€" When Airbus executives arrived here seven years ago scouting for a location to assemble passenger jets, the broad, flat expanse next to Tianjin Binhai International Airport was a grassy field.

Now, Airbus, the European aerospace giant, has 20 large buildings and is churning out four A320 jetliners a month for mostly Chinese state-controlled carriers. The company also has two new neighbors â€" a sprawling rocket factory and a helicopter manufacturing complex â€" both producing for the Chinese military.

The rapid expansion of civilian and military aerospace manufacturing in Tianjin reflects China’s broader ambitions.

As Beijing’s leaders try to find new ways to invest $3 trillion of foreign reserves, the country has been aggressively expanding in industries with strong economic potential. The Chinese government and state-owned companies have already made a major push into financial services and natural resources, acquiring stakes in Morgan Stanley and Blackstone and uying oil and gas fields around the world.

Aerospace represents the latest frontier for China, which is eyeing parts manufacturers, materials producers, leasing businesses, cargo airlines and airport operators. The country now rivals the United States as a market for civilian airliners, which China hopes to start supplying from domestic production. And the new leadership named at the Party Congress in November has publicly emphasized long-range missiles and other aerospace programs in its push for military modernization.

If Boeing’s difficulties with its recently grounded aircraft, the Dreamliner, weigh on the industry, it could create opportunity. Chinese companies, which have plenty of capital, have been welcomed by some American companies as a way to create jobs. Wall Street has been eager, too, at a time when other merger activity has been weak.

Washington is trying to figure out what to do about China’s deal-making broadly. “Many of these transactions raise important secu! rity issues for our country,” said Michael R. Wessel, a member of the U.S.-China Economic and Security Review Commission, which was created by Congress to monitor the bilateral relationship. “China’s interest in promoting these investments isn’t necessarily consistent with our own interests, and it’s appropriate to thoroughly examine the transactions.”

In aerospace, the Chinese deal-makers have deep ties to the military, raising additional issues for American regulators. The main contractor for the country’s air force, the state-owned China Aviation Industry Corporation, known as Avic, has set up a private equity fund to purchase companies with so-called dual-use technology that has civilian and military applications, with the goal of investing up to $3 billion. In 2010, Avic acquired the overseas licensing rights for small aircraft made by Epic Aircraft of Bend, Ore., using lightweight yet strong carbon-fiber composites â€" the same material used for high-performance fighter jets.

“There has always been an obvious cross-fertilization of ideas, expertise and money between the civilian and military,” said Martin Craigs, a longtime aerospace executive in Asia who is now the chairman of the Aerospace Forum Asia, a nonprofit group in Hong Kong. He added that Chinese companies had been actively hiring senior American and European aerospace engineers, so national security concerns could be circumvented by hiring the right people.

The push into aerospace coincides with growing worries in the West and across Asia about China’s in! creasingl! y assertive territorial claims, including the dispatch of Chinese warships to waters long patrolled by Japan, the Philippines and Vietnam.

Coincidentally, hours after the A.I.G. deal was announced, two Chinese navy destroyers and two frigates showed up in disputed waters patrolled by Japan. China and Japan have stepped up public criticisms of each other since. And the Obama administration has begun a strategic “pivot,” shifting military forces from the Mideast back to the western Pacific, a move that Chinese officials have criticized as an attempt to contain their country.

Such confrontations in the region are drawing attention to China’s deal-making ambitions.

In October, a $1.79 billion bid by a business linked to Beijing’s municipal government to acquire the corporate jet and propeller plane operations of bankrupt Hawker Beechcraft in Wichita, Kan., fell apart over national security concerns in Washington. Executives found it hard to disentangle the civilian operations from the ompany’s military contracting business.

But many aerospace experts predict that Chinese investors and companies will find ways to appease American regulators. “There will be concerns undoubtedly and generally quite valid, but the commercial imperatives are such that people will find a way around them,” said Peter Harbison, the chairman of CAPA-Center for Aviation, a global aerospace consulting firm.

The sale of A.I.G.’s leasing business is expected to face scrutiny by the Committee on Foreign Investment in the United States, the government panel that reviews the national security implications of deals involving foreign buyers.

The group’s customers include many of the largest carriers in the United States, and the federal government has long counted on being able to use civilian passenger jets to transport troops overseas during a national emergency. When Saddam Hussein sent the Iraqi army into Kuwait in 1990, the Defense Department relied on the emergency mobilization of ! civilian ! jetliners to ferry 60 percent of the soldiers sent to and from the Mideast during the first Persian Gulf war and a quarter of the cargo, according to a RAND study.

Henri Courpron, the chief executive of A.I.G.’s International Lease Finance Corporation, said that he did not believe the United States should be concerned that the acquisition would prevent civilian aircraft from being available in a future crisis. Only 8 percent of the company’s aircraft are currently leased to American air carriers, and most of these are narrow-body aircraft that lack the range to ferry troops across oceans.

“It’s really a nonissue â€" we have 900-plus aircraft in our fleet, and there are only 11 wide bodies” currently being leased to American carriers, he said in a telephone interview. He added that the carriers have control over the aircraft during the leases. Executives from the consortium buying the stake in the leasing company declined repeated requests for interviews.

Chinese suitors in the aeospace industry understand the concerns. In part, they watched the experience in the natural resources industry. The China National Offshore Oil Corporation failed in its 2005 bid to acquire Unocal after intense political opposition. After that, Chinese energy giants have been more cautious, pursuing minority stakes in the United States and limiting their outright acquisitions.

Chinese companies are taking a similar tack in aerospace, pursuing joint ventures and technical cooperation agreements alongside acquisitions. For example, Avic is working with General Electric and other American aerospace companies on the production of a civilian jetliner, the C919. Beijing envisions the narrow-body C919 as the next step toward building a domestic aerospace business that can compete with Boeing and Airbus.

Western companies and their advisers say that they are acutely aware that technology transfers could help China strengthen its military and develop more competitive civil airplanes, and are taki! ng precau! tions to protect trade secrets and national security. “You transfer the part that is most easily reverse engineered, or easily dissected,” said a lawyer with detailed knowledge of these transactions.

But many in the aerospace sector are more skeptical that the West can avoid losing control of technology. “The mentality is, they’re going to find a way to get there anyway, and we may as well get there with them,” Mr. Harbison of the CAPA-Center for Aviation said.

Airbus executives say that they are being prudent. They add that there are few trade secrets about the A320 manufactured here, an aircraft that was designed in 1986. “The A320 is well known all over the world,” said Jean-Luc Charles, the general manager of Airbus’s operations here.

A tour of the main assembly area, a hangar with gray steel walls and large red cranes overhead, suggests that it may be possible to protect the technology. The seats are installed here and the aircraft painted, but the factory is largely asembling planes from kits imported from Europe. Entire fuselages, with green protective coatings, are brought by ship from Hamburg, Germany. Even the stepladders and freight elevators give weight limits in German, and the tool boxes are labeled in English, not Chinese.

Mr. Charles said that 95 percent of the parts are still imported, and that it would take many years for that amount to shrink. “One by one, we start to give them the parts,” he said. “But each subassembly is a complex project, it takes five years.”

A Chance to Rub Shoulders With the Elite of Business and Politics

The minimum $20,000 entry fee has been paid. Fur hats and silk underwear are in the luggage. And stacks of business cards are ready to be slipped into the palms of the business and political elite gathering this week at the snowy alpine fortress that is the World Economic Forum in Davos, Switzerland.

For the more than 2,500 people making the pilgrimage this year, some personalities will command more attention than others. On the Continent, where fears of the euro’s imminent demise dominated thinking for the last year, Chancellor Angela Merkel of Germany and the president of the European Central Bank, Mario Draghi, are being credited rather than pilloried these days for saving the euro from disaster.

Together with Prime Minister Mario Monti of Italy and the International Monetary Fund’s managing director, Christine Lagarde, they will be among the keynote speakers on whether Eur! ope’s fortunes will at last take a turn for the better.

Prime Minister David Cameron of Britain may throw cold water on that idea, if he attends. But in Davos, if he does turn up, his main task may be to explain why investors should not be spooked by his warning that Britain may drift away from the European Union.

With plenty of dynamism stirring outside Europe, emerging markets leaders will be making the case for investment dollars to flow their way. Executives and academics from China and India will swarm the halls to discuss the evolution in their economic climate, which has cooled since a year ago but remains well ahead of those in Western economies.

Prime ministers from a number of African countries will also make the trek to explain how dynamism continues to build, especially on the southern partof the continent. Two years after the Arab Spring unfolded, numerous decision-makers from North Africa will outline plans for overhauls and address the political, social and economic transitions, and upheavals, in their countries.

With fighting in Mali still making headlines and the Algerian gas-field hostage disaster still being sorted out, North African issues are very likely to be prime topics.

Not everyone has been panting to get to Davos. Officials from the United States, for example, will barely be represented. But those coming â€" including Senator John McCain, Republican of Arizona, who is a regular at the forum, and Susan Rice, the United S! tates amb! assador to the United Nations and a former candidate to be the next secretary of state â€" are likely to stir controversy.

And some of the highest-wattage regulars are turning their attention elsewhere. Three notable absentees will be the top Google executives, Sergey Brin, Larry Page and Eric E. Schmidt. (For Mr. Schmidt, Davos evidently doesn’t have the same allure as North Korea, where he visited recently.) Google has not said why its leaders are not attending.

But some other men with big money will be on hand, though Jamie Dimon, the chief of JPMorgan Chase, can’t count on quite as much money as before, now that the bank’s board had decided to dock his pay after a multibillion-dollar trading loss in 2012.

Stephen A. Schwarzman of the Blackstone Group, Brian T. Moynihan of Bank of America and George Soros will all be sniffing out investments. So will Lloyd C. Blankfein, the head of Goldman Sachs, who has shunned Davos in the past but decided to join the party this time.

It’s not all about deals, though. Bill and Melinda Gates, hardy Davos perennials, will again be there to preach the need to invest in what counts for future generations: education, health and related philanthropic activity.

For celebrity sizzle, the South African actress Charlize Theron will be in t! own to pr! omote her Africa Outreach Project. The forum discouraged celebrities for a while after Sharon Stone stole the show in 2005 and Brad Pitt and Angelina Jolie did the same the following year. Since then, a few stars have swanned in, mostly, it seems, out of curiosity.

Last year, Mick Jagger sidled into a spate of private Davosparties wearing a velvet plum jacket and a lilac shirt, speaking eruditely about current events with people like Jimmy Wales, the founder of Wikipedia, before busting a few lanky dance moves late in the evening.

This year, another power broker expected to prowl the corridors is Derek Jeter of the New York Yankees. Whether anyone will consider face time with him a must probably depends on a given attitude toward American baseball generally, and the widely followed Yankees specifically.

With Tax Advantages Looking Shaky, Private Equity Seeks a New Path

As Washington grapples with the country’s fiscal woes, the private equity industry is grudgingly facing a new reality: its long-held tax advantages are likely to disappear.

For years, private equity has quashed efforts to raise taxes on so-called carried interest income, the profits partners receive as part of their compensation. Those earnings are considered capital gains, so they are taxed at a much lower rate than ordinary income.

While few concede defeat publicly, the industry is rethinking its strategy. Rather than trying to stop the changes outright, lawyers and executives behind the scenes are trying to minimize the hit if it happens.

Private equity recognizes the shifting politics. In the current budget debate, sacred cows like the tax deductions for home mortgage interest and charitable donations are on the table, alng with potential cuts to Social Security and Medicare.

“Once they start looking for revenues, carried interest will be on the list,” said Anne Mathias, director of Washington policy research at Guggenheim Partners, a financial services firm. “You can hear it already: ‘We need that money, or Grandma won’t get a new hip.’ ”

Democrats and Republicans alike are looking at eliminating loopholes as part of a broader effort to overhaul the tax code. Changes to the treatment of carried interest could bring in $17 billion over 10 years, according to Congressional estimates.

“There is ! absolutely no reason why income earned for managing other people’s money shouldn’t be taxed in the same way as income earned teaching or working in a factory,” said Representative Sander M. Levin, Democrat of Michigan, who introduced the latest carried interest bill in 2012. Legislation based on Mr. Levin’s bill is likely to be part of a broader package if carried interest comes into play.

Officially, the private equity industry remains opposed to change. Its lobbying group, the Private Equity Growth Capital Council, began an extensive public relations campaign last year to improve the industry’s image during the presidential race, in which the Republican candidate, Mitt Romney, was criticized for his actions as chief executive of the private equity firm Bain Capital.

The trade group also increased its ongressional lobbying. To highlight the industry’s economic contributions, it arranged 70 meetings in which House members visited private-equity-owned companies or met their chiefs. For example, Representative Robert Hurt, Republican of Virginia, toured a distribution center for Dollar General, a retailer previously owned by Kohlberg Kravis Roberts.

“We will continue to do what we have always done,” said Steve Judge, chief executive of the trade group.

He and others argue that it is appropriate to treat private equity income as capital gains because managers have money at risk and actively reorganize companies. Mr. Judge also noted t! hat priva! te equity is already paying more under the deal to avert the fiscal cliff, which raised the capital gains tax rate to 20 percent from 15 percent, on top of the 3.8 percent capital gains surcharge enacted on wealthy taxpayers to finance President Obama’s health care law.

But even as the industry continues to press its case, many of its members acknowledge that the carried interest break is coming to an end. “At some point it’s inevitable, so they will deal with it,” said Bradley Morrow, a senior private markets consultant at Towers Watson. If the proposal does re-emerge, the industry is expected to focus its lobbying on softening transition rules.

One issue will be the amount of carried interest reclassified as ordinary income. Mr. Levin’s2012 bill would convert 100 percent of carried interest. By contrast, an earlier version of the bill proposed capping the affected income at 50 percent to 75 percent.

The industry is also likely to focus on how quickly any changes would go into effect. Lobbyists will probably push for a longer delay, even if it means little or no cap, said Micah W. Bloomfield, a tax lawyer with Stroock & Stroock & Lavan. That would give partners more time to pocket capital gains or restructure funds before the rate increase took effect.

Another point of contention will be the treatment of profits that partners earn when they sell stakes in their firms, a sum known as enterprise value. Currently, profits attributable to enterprise value are treated as capital gains. In earlier bills, they would have been reclassified as ordinary income.

“What people complained most vociferously about in the earlier bills was the treatment of enterprise value,” said James R. Brown, a tax lawyer with Willkie Farr & Gallagher. If a fund manager sold the business, “all the gain from the sale would have been considered ordinary income,” Mr. Brown said. “That’s a big difference in how any other business is taxed when it’s sold.”

The Obama administration and Congressional proponents of reform acknowledge the problem. Mr. Levin’s latest bill included provisions to treat enterprise value as capital gains. The issue is particularly important for large, publicly traded firms like Blackstone and K.K.R. As partners near retirement, they see it as crucial to get capital gains tax treatment when they divest their stakes.

But the issue is complex. Congressional tax staff, worried that firms could redefine some carried interest as enterprise value, wrote the language of the bill narrowly to prevent abuse.

Private equity advocates arguethat the bill still casts too wide a net, and that some legitimate profits from business sales would end up classified as ordinary income.

“They may think they have solved the issue, but they haven’t,” said one industry lobbyist, who requested anonymity because of the delicacy of the discussions.

Beyond transition rules, firms might consider adapting their own structures if the break does end.

The simplest strategy â€" one already occurring â€" is to accelerate the recognition of accrued capital gains. Funds might also remove some unrealized carried interest from their investment partnerships altogether, said Steven Rosenthal, a visiting fellow at the Washington-based Tax Policy Center. They could do that by shifting ownership of the gains to an affiliate by distributing securities of equal value.

These ideas may not all work, but funds are preparing nonetheless. Many have added language to partnership agreements, reserving the right to restructure, Mr. Brown said.

Tax lawy! ers have been searching for a broader escape hatch for years, in something of a cat-and-mouse game with legislators. In one early proposal, the lawyers suggested that general partners borrow money from limited partners to help capitalize a fund. They also explored setting up funds using foreign corporations that allow income to flow through to their owners as capital gains. But legislators rejected those ideas in later bills.

A potential strategy still being discussed involves setting up new funds as America-based C corporations, which the Internal Revenue Service taxes separately from their owners. In one possibility, a private equity firm would create a corporate holding company to buy and manage each individual portfolio company, instead of buying them through a partnership.

The private quity partners would then receive holding company shares, rather than being paid with carried interest. The private equity managers would pay ordinary income taxes on the initial share distribution, but any further increase in the shares’ value would be considered capital gains.

The structure is similar to one used in venture capital, said Patrick B. Fenn, a tax lawyer with Akin Gump Strauss Hauer & Feld. “People are looking at this, but no one has gotten to the point where they’d do it for their next fund,” Mr. Fenn said. “You won’t see any real reaction on structures until we see the specifics.”

Added Mr. Morrow of Towers Watson: “There are a number of ideas on the drawing boards. I’m not sure any of them will work, but the tax lawyers and accountants are certainly working on it.”

In Euro Zone, Signs of Progress and Fears of Complacency

PARIS - This may be the year that Europe stops being the ticking time bomb of the global economy.

Ireland is on track to leave international bailout limbo by summer. Talk of Greece leaving the euro is off the table. And financial speculators have generally stopped betting the euro zone will blow up.

But even as the sense of emergency fades, Europe is potentially facing a starker problem.

For three years, Chancellor Angela Merkel of Germany and a phalanx of policy makers have been working to shore up the euro’s foundations to prevent the currency union from unraveling. As they gather with academics, executives and various experts this week at the World Economic Forum, which opens Wednesday in Davos, Switzerland, the biggest concern is that leaders might become less vigilant now that the heat is off, ushering in a raft of new troubles that could dog the euro for years to come.

“The risk is that complacency takes hold because there is no more urgency in the crisis, and that everything that has been done up until now will be deemed sufficient,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. If that happens, he warned, “Europe will turn into the next Japan, and become a permanently depressed or stagnating economic area.”

Ms. Merkel might be forgiven for feeling a sense of vindication. Her deliberate approach to crisis management and refusal to get too far ahead of German public opinion has often frustrated her euro zone peers and foreign allies. And yet, the strategy seems to have worked â€" so far, at least. Ms. Merkel, who is to speak at Da! vos on Thursday, and other European leaders have generally done just enough to contain the crisis without alienating taxpayers.

Much of the credit for the current calm in Europe goes to Mario Draghi, the president of the European Central Bank. He appeased financial markets with his promise last summer to do whatever it took to preserve the euro, including buying the government bonds of Spain if necessary to keep a lid on the country’s borrowing costs.

The effect of Mr. Draghi’s promise has been evident: financial markets have stopped driving the borrowing costs of Spain and Italy toward the danger levels that led Ireland, Greee and Portugal to reach for international financial lifelines. Today, few people fear that Europe’s southern countries will break away from the euro union.

Other dire prospects, like Germany and other Northern European countries fleeing the euro union to avoid getting caught in a quagmire, have also dropped off the watch list. If anything, the focus of anxiety is the fiscal situation in the United States, where gridlock in Washington has become just as debilitating for the country’s finances as the euro policy paralysis was for European politicians.

“Some European policy makers who visited the United States recently were delighted to see that because of the fiscal cliff, Europe wasn’t on every channel,” said Kenneth S. Rogoff, a professor of economics at Harvard University. “There is an ! ecstasy o! ver the fact that they won’t blow apart tomorrow.”

Still, Mr. Rogoff added, Europe must revive economic growth to fully address its problems. “And even if they do, that’s not a long-term solution,” he said. “They need to integrate more fully, or they will fall apart.”

Europe’s political leaders have taken important steps to improve spending discipline among euro members, to provide a financial backstop for troubled euro zone countries and to consolidate supervision of banks. Despite many imperfections, the measures seem to have been enough to convince investors that officials are slowly constructing a more resilient currency union.

“European countries have shown their resolve in making the euro a success and reaffirmed the deep political commitment to work together toward a stronger union,” Vítor Constâncio, the vice president of the European Central Bank, told a audience in Beijing on Jan. 12.

But leaders have yet to address some serious flaws in the structure of the euro zone. For example, they have not solved the problem of how to wind down terminally ill banks without sticking taxpayers with the bill. And they are far away from a deposit insurance fund for Europe, which means the risk of bank runs remains.

“In order to define a turning point, you need a lot of factors besides the stabilization of financial markets,” Mr. Draghi said this month.

But coming events could undermine confidence. Germany will hold national elections in September, which could make Ms. Merkel even more cautious than usual and stall euro zone decision making. Already, her main rivals pulled off an upset in regional elections this weekend in Lower Saxony.

Italian elections are also looming. Mari! o Monti, the prime minister who has restored Italy’s international credibility and is to speak at Davos on Wednesday, faces a public that is grumpy about a rollback of job protections and other policy overhauls. Silvio Berlusconi, a former Italian prime minister who presided over years of economic standstill, is attempting a populist comeback.

In France, President François Hollande’s pledge to bring the deficit down to 3 percent of gross domestic product this year to adhere to the rules governing euro membership may be challenged if France’s military engagement in Mali and the surrounding region turns into a drawn-out affair.

Across the channel, Prime Minister David Cameron of Britain, who is scheduled to speak at Davos on Thursday morning, has sounded warnings that the country might leave the European Union if changes in its administration are not made. “The danger is that Europe will fail and that the British people will drift toward the exit,” according to prepared text of a speech Mr. Cameron postponed delivering last week because of developments in the hostage crisis in Algeria.

In the meantime, the severe effects of prolonged austerity in several European countries are leaving deep social scars. Tax increases and steep spending cuts have ground many European citizens deeper than ever into hardship, prompting millions to demonstrate in Greece, Italy, Portugal and Spain. Recessionary economies in those countries are expected to! get wors! e before they improve.

In Greece, where austerity has hit the hardest, people are burning trash and wood this winter for lack of money to pay electricity bills, and the government’s efforts to enact structural overhauls needed to turn the economy around and attract foreign investors continue to lag.

And then there is Germany, which itself is being tugged into a slowdown as its cash-poor southern neighbors continue to refrain from buying Audis and other high-priced German goods.

Unemployment in the euro zone continues to climb: the jobless rate in the 17 countries of the bloc hit a record 11.8 percent in November. Youth unemployment has surpassed 50 percent in Spain and Greece, a stratosphere of despair. Thousands of bright young people continue to flee Greece, Ireland, Spain and other countries every month for the booming economies of Australia and Canada.

Portuguese workers are even going to Africa in search of a better future, as the middle class there grows along with improving conomic conditions on the southern part of the African continent.

Yet painful adjustments are starting to bear some fruit. Labor costs have come down in countries including Spain and Portugal, helping make their work forces more competitive within the region. In Spain, for instance, where unit labor costs have fallen 4 percent since the onset of the financial crisis in 2008, the labor market is now so alluring that Ford, Renault and Volkswagen have announced plans to expand production there.

In addition, the alarming flight of deposits from banks in Spain has come to a stop.

The euro zone’s problems have proven an opportunity for some countries to remove structural impe! diments t! o growth. In France, where Mr. Hollande has promised to make the economy more competitive, labor unions have agreed to a deal to overhaul swaths of the notoriously rigid labor market.

The deal would tame some of the French labor code’s most confounding restrictions, including lengthy hiring and firing procedures and outsize business taxes, as the country tries to lift its competitiveness, curb unemployment and improve the budget.

“Is the worst over Probably yes,” analysts at Barclays Capital wrote in a recent note to clients.

That will be especially true if leaders and businesses persist in using the crisis as a chance to renew European competitiveness.

While some countries may have made enough economic overhauls to enjoy substantial growth, once the crisis is past, said Nicolas Véron, a senior fellow at Bruegel, a research institte in Brussels, “there are a lot of nuts still to crack.”

Jack Ewing reported from Frankfurt.

$11.2 Billion Thai Bid Poised to Win Singapore Conglomerate

HONG KONG- After four months of fierce bidding between two rival Asian tycoons, a multibillion dollar battle for control of the Singapore conglomerate Fraser & Neave appears to have reached its denouement.

A Monday evening bidding deadline that had been set by Singapore’s takeovers regulator came and went â€" meaning the victor will probably be T.C.C. Assets, controlled by the Thai Charoen Sirivadhanabhakdi, whose sweetened offer on Friday of 9.55 Singapore dollars per share valued Fraser & Neave at 13.76 billion dollars, or $11.2 billion.

That apparently was enough to chase away a counteroffer by the rival bidder, Overseas Union Enterprise â€" which is part of the Indonesian billionaire Mochtar Riady’s Lippo Group and is led by Mr. Riady’s son Stephen. O.U.E. had entered the contest for Fraser & Neave in November, when it bid 9.08 dollars per share in a deal worth 13.08 billion dollars, or $10.6 billion.

Under the terms of the auction process, designed to remove uncertaint for shareholders, that was mandated last week by Singapore’s Securities Industry Council, the takeovers regulator, O.U.E. had until 6 p.m. on Monday to submit an increased offer.

Had it done so, T.C.C. would have had another 24 hours to counter, and the auction process would have continued in this manner until one of the parties failed to submit a counterbid.

On Monday evening shortly after the deadline had lapsed, a spokeswoman for O.U.E. declined to immediately comment.

Fraser & Neave, established in 1883 to sell carbonated drinks in Southeast Asia, today owns businesses that include beverages, shopping malls and serviced apartments. In September, the company agreed to sell its controlling stake in Asia Pacific Breweries, maker of Tiger Beer, to Heineken in a deal worth $4.6 billion.

T.C.C. already owned a 30 percent stake! in Fraser & Neave, and in September made an initial takeover bid for the company at 8.88 Singapore dollars per share. Since then T.C.C. has boosted its stake to 40 percent. The Thai firm’s sweetened bid on Friday represented a 5.2 percent premium to the offer submitted by O.U.E. in November.

The passing of the Monday deadline without a counterbid from O.U.E. means shareholders are likely to favor the higher offer from T.C.C. when they eventually vote on the deal. A vote has yet to be scheduled.

Investors in Fraser & Neave have been bullish on the prospect of a bidding war for the last few months. On Monday, an hour before the takeover regulator’s deadline for the announcement of final bids, the stock closed at a record high of 9.74 dollars. That was up 1.7 percent from the closing price Friday and above any of the takeover bids that had been announced up to the end of the trading day.

O.U.E. is being advised by Credit Suisse, Bank of America’s Merrill Lynch unit and C.I.M.B. of Malaysia. The financial advisers to T.C.C. are the United Overseas Bank, D.B.S. of Singapore and Morgan Stanley.