Eurozone crisis: France relegated to 2nd division
16 January 2012
Standard & Poor's 13 January downgrade of France’s credit rating is a double blow: Nicolas Sarkozy and his presidential election rivals will come under even greater pressure from the markets while the North-South divide in Europe has grown significantly wider.
S&P’s decision to downgrade France, announced on Friday 13, is both a financial non-event and a political bombshell. It is a non-event because for quite some time, institutional investors, who are the real target audience for these ratings, have shown that they do not believe that France and a number of other major European sovereign states should be ranked among the world’s most reliable countries. And this has been reflected by the price that Paris has paid to borrow on international markets, which for several long months, has been significantly higher than the one demanded from Berlin. The loss of the AAA rating, which had already been anticipated by the markets, is not in itself an economic catastrophe.
First and foremost, only one of the three international ratings agencies has decided to relegate France to the 2nd division. Secondly, the loss of the best possible grade does not necessarily or immediately pave the way for financial apocalypse. The United States, which lost its AAA status in August, is still able to borrow very cheaply. Although having said that, it is true that the dollar confers on the world’s largest economic power a number of advantages that France does not have.
Nonetheless, Standard & Poor's decision will have an impact on the cost of funding in France – the state, its executive agencies, and local authorities will now have to pay more for loans. As a result, the macro-economic management of the country will be more difficult. France had 20 out of 20, and now it will only have 19 out of 20. However, in spite of everything it will remain, as the government has been quick to point out, a very safe investment.
Hardly a reason for rejoicing on the French left
The decision, which was expected, nonetheless amounts to a political bombshell: an unflinching punishment of French economic policy in recent years, and in particular of the policy pursued by the head of state, who had made the conservation of AAA status the main goal of his strategy. However, Nicolas Sarkozy’s realisation of the need to cut spending and to tackle the level of debt came too late.
But the most serious aspect of the S&P decision is the manner in which it has highlighted a faultline in Europe. The eurozone is now divided into two Europes: one composed of disciplined northern countries with balanced books and a real potential for growth, grouped around Germany which managed to avoid the downgrade; and another made up of southern states with very limited growth prospects that are currently facing serious financial difficulties. Downgraded along with Spain and Italy, France is now part of this second-tier Europe.
As a result, Paris will have to defend a weaker position in future negotiations with Berlin. The ratings agencies did not care for the outspoken attacks directed against them by Nicolas Sarkozy during the subprimes crisis, and perhaps they are now getting their revenge. But this is hardly a reason for rejoicing on the French left. These are difficult times, and they will remain difficult for whoever wins the day on 6 May [the second round of French presidential elections]. In all of this, it is the euro which runs the risk of being the main victim.
Translated from the French by Mark McGovern