Moody’s Downgrades France’s Credit Rating
France lost its top aaa credit rating from Moody’s Investors Service on Novembers 19. The rating’s agency cut its rating to Aa1, citing concerns about the nation’s short term economic growth, long term weakness and its ability to cope with “future euro area shocks.” The cut in ratings increases the distance between Germany and France, putting France on the back foot at time of key negotiations about the euro’s future.
Another ratings agency, Standard & Poor’s, cut France’s rating several months ago. But Moody’s isn’t the only one drawing attention to France’s weak position right now. Britain’s Economist magazine incurred the wrath of the French government last week by highlighting France’s weak economy in a 14-page special report. The front cover showed a lit fuse emerging from a group of baguettes, under the headline “The time-bomb at the heart of Europe.”
“The pressure for reform and budget cuts is fiercest in Greece, Portugal, Spain and Italy, which all saw mass strikes and clashes with police this week,” the Economist wrote. “But ahead looms a bigger problem that could dwarf any of these: France.”
Germany has “cut costs and pushed through big reforms,” leaving France borrowing money to try and keep up, the article explained. Regulations are choking economic growth. “Not surprisingly, new companies are rare. France has fewer small and medium-sized enterprises, today’s engines of job growth, than Germany, Italy or Britain.”
France, the article warns, could quickly lose the backing of investors and Germany. “The crisis could hit as early as next year. Previous European currency upheavals have often started elsewhere only to finish by engulfing France—and this time, too, France rather than Italy or Spain could be where the euro’s fate is decided.”
Meanwhile, Europe finance ministers plan to meet on the evening of November 20 as European leaders and the International Monetary Fund (imf) are at loggerheads on how Greece’s bailout should proceed. Greece is meant to reduce its debt burden to sustainable levels by 2020. Eurozone leaders want to extend the deadline by two years. Instead, the imf wants eurozone governments to accept a haircut on money they’ve loaned Greece—meaning that Greece would not be expected to pay all the loans back.
As European leaders once again gather to examine some long-term solutions for the eurozone, France is on the back foot. “This downgrade will certainly increase pressure on France big time,” director of the Carnegie Endowment for International Peace office in Brussels, Jan Techau, told Bloomberg. “It gives Germany more of an edge over France.”
It is obvious that the days when Europe was led by a Franco-German alliance are over. France is part of the problem, leaving it up to Germany to provide the solution.