The European Union summit in June was clearly an upside surprise: in effect, the Latin bloc forced German Chancellor Angela Merkel to bend, at least slightly. But was it good enough?
In an online article for Vox, the economist Charles Wyplosz argued, sensibly, that it was nowhere close. "At the end of the day, the summit was a little move in the right direction on bank supervision, but keep watching; we still don't know what will actually be put in place," he wrote on June 30. "There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries."
The main substantive thing was the agreement in principle to set up something more or less like a European version of the Troubled Asset Relief Program in the United States, in which funds for bank recapitalization will be supplied by a consortium rather than lent to governments already overburdened with debt. Good move, and Irish bond buyers are especially happy. But even this doesn't take effect right away. (Also some bond purchases, but not by the European Central Bank, so they're limited in size. So think of this as a very small version of quantitative easing.)
What we know, even for the United States, is that T.A.R.P. and quantitative easing were perhaps enough to forestall disaster, but not to produce recovery — and Europe has the additional problem of huge needed realignments in competitiveness, which would be much easier if the E.C.B. announced a dramatic loosening — which it didn't.
Not nearly enough, then Yet markets were buoyed.
I guess you can argue that this was sort of a down payment — that it is the harbinger of bigger policy changes to come. I hope so. But like Mr. Wyplosz, I suspect that we're overreacting to the simple if admittedly surprising failure to achieve disaster.
The Hart of the Matter
And now for something completely different: I haven't seen anyone point this out, but a very interesting New York Times article published on June 24 on why Microsoft is building its own tablet computer was a perfect illustration of Oliver Hart's theory of the firm.
Just briefly: the Harvard economist's theory of the firm asks why we sometimes rely on contracts — I sign an agreement with your company to make my widget — and sometimes go for direct control: I employ people to make widgets. Mr. Hart (and others) argue that such things depend crucially on our inability to write complete contracts, specifying all details — and that the incompleteness of contracts can pose problems for investment decisions. For example, if you contract with other people to build equipment, they may be unwilling to invest in quality in the belief that you will use your sole-buyer status to extract the benefits.
And that, apparently, is exactly what has been going on with Microsoft; its reliance on other people to build computers using its software worked very well for a long time, but lately Apple's control-freak approach has been winning out.
This article was great fodder for the kind of economic analysis that I would be doing more of if we weren't in such dire straits.