Economics

Free exchange

The euro zone crisis

France goes soft-core

Jan 14th 2012, 12:38 by J.O. | LONDON

AAAFRIDAY, January 13th, proved unlucky for nine euro-zone countries: they had their credit ratings cut by Standard and Poor’s (S&P) soon after the American markets closed for the week. France and Austria were stripped of their triple-A credit rating. Three smaller euro-zone countries (Malta, Slovenia and Slovakia) also suffered a one-notch downgrade. Italy and Spain had their ratings knocked down by two notches (to BBB+ and A respectively), as did Portugal and Cyprus, whose debts are now considered junk by S&P.

Though grim, the news was not the blanket downgrade feared by eurocrats. In December S&P had given a warning of a possible downgrade to all euro-zone countries, bar Greece (which could fall no further) and Cyprus (which was already on the hit-list)—just days before leaders of the European Union met in Brussels to tackle the euro-zone crisis once and for all. S&P argues that their fire-fighting efforts have fallen short of what is needed, hence the downgrades. The December summit had "not produced a breakthrough of sufficient size and scope to fully address the euro zone’s financial problems,” the ratings agency said in a statement.

According to S&P, EU leaders have misdiagnosed the euro-zone crisis. They have focused too much on tackling the increase in governments’ budget deficits, which is only part of the problem. As a result, they did not pay enough attention to the deeper causes of the crisis: the divergence in competitiveness between the euro-zone’s core of strong economies and its struggling "periphery" as well as the huge cross-border debts that stem from this gap. Reforms based solely on fiscal austerity could easily become self-defeating, notes S&P.

Although the summit's failures are shared, not all members of the euro zone have to bear the penalties in terms of lower credit ratings. Ireland has retained its investment-grade of BBB+. The ratings on Belgium and Estonia were also left alone. And crucially, S&P reaffirmed the triple-A credit ratings of Germany, the Netherlands, Finland and Luxembourg. There is no small irony here. Having identified the euro’s internal imbalances as the main issue, S&P’s own ratings favour the euro zone’s saving gluttons who are part of the problem. These countries have persistently run current-account surpluses, and a surplus is an imbalance, after all. It seems that mercantilism has paid off—except in the case of Austria, whose economy is judged too close for comfort to trouble spots, such as Italy and Hungary.

France is neither thrifty nor competitive enough to be lumped in with the saving gluttons. Its downgrade was widely expected and in principle should already be factored in by forward-looking bond markets. Indeed the price of US Treasury bonds even rose (ie, yields fell) when S&P withdrew America’s triple-A credit rating in August. French politicians are playing down the significance of the changes. "It is not good news…but it is not a catastrophe," was the response of the country’s finance minister, François Baroin. S&P itself suggested that the downgrade was not the end of the world. Only three euro-zone countries are rated junk, it said. The rest are still investment grade and therefore very unlikely to default.

Yet so fragile is confidence in markets for euro-zone bonds that investors are unlikely to greet the ratings downgrade with a Gallic shrug. In the case of France, it is not only a blow to the country's prestige. It also tears a hole in the already threadbare euro-zone safety net, the European Financial Stability Fund. That is now backed by only four AAA-rated countries, which account for less than half of euro-zone GDP. The faith in euro-zone bonds is bound to be unsettled.

The S&P decision, however, may not even be the biggest source of anxiety. Talks between Greece and its private-sector creditors on the losses these should bear broke down on Friday afternoon. This failure raises the spectre of a messy Greek default. In such circumstances, investors might take a hint from the revised S&P ratings. If things go horribly wrong, Germany is now the only big euro-area bond market in which investors’ money might be considered truly safe.

Readers' comments

The Economist welcomes your views. Please stay on topic and be respectful of other readers. Review our comments policy.

Sort:

Liveinhope

Compare Japan now and Germany perhaps

Interesting reading though the hard copy last week. The article on Japan and it's latest change into a current account deficit.
Back to 2009 Japanese exports continued to rack in the money - But that was when the Yen was much lower.
Since then interest rates have dropped everywhere else to the same levels as Japan.
And now Japan has a current account deficit. Of course this is not a good mix along with Political indecision.
Of course - Japanese Industries are now going to start moving out because the very high value of the Yen, and much lower export and of course now a current account deficit.

Now let us see - Euro is down because of the financial mess, and coincidentally Germany is smiling all the way to the Bank. And what's more it does not have to do anything to keep the Euro down, except prolong the crisis.

Should the Eurozone fall apart and the Germans were to go back the Mark the Present Japanese crisis would start applying to Germany as well.

Germany has not the same problems as Japan at this moment - But let us go back to the dark days of no growth, and high unemployment and high budget deficits.

I don't think that Germans would like tgo go back to those days again.

The Germans are not stupid - they will continue to prolong the crisis, all the while knowing what has happened to Japan.

Sigfried1871

Marie,

"we had 3 good reasons to do it, remember, we didn't know that Germany was rearming, and training in soviet Union, the last time it turn to be bad for the whole planet"

I know winner is writing the history but its not entirely true, all people who got colonized by france and england become their chance to free themselfs after WW2.

One anectdote, once I had to prolongate my card de sejour in Ivory Coast, as the administration privileged me while waiting at the end of a queue of 20 Frenchman waiting for their papers, telling me people there would love the Germans as they tried to colonize the French as they tried to colonize them..just travel Arabia and some parts in Asia and eastern Europe and you will here the same..

Sigfried1871

sorry but i dont get the economical mechanism why Euro should have been subsidizing eastern germany transformation..makes no sense at all ur statement

Marie_Claude in reply to Sigfried1871

MF Garaud, a former Chirac adviser, explained it, Kohl adopted the euro for inner policy reasons !

http://www.dailymotion.com/video/xj7xvj_marie-france-garaud-l-euro-c-est...

and, read from "THE REBIRTH OF GERMAN EXPANSIONIST AIMS"

"German reunification commenced on July 1, 1990, when the two economies and currencies merged. West Germany created a US$ 71-billion unity fund to facilitate the reunification. However, other member nations of the EC also have been made to pay for German reunification. Without consulting other EC governments, Chancellor Kohl equated the Deutschmark of his economically strong West Germany with that of the economically weak former communist East Germany. High interest rates were implemented by the Bundesbank in order to maintain the strength of the combined East/West Deutschmark at the international level of the West German mark. This however, pushed other EC countries faster into recession, which was clearly affecting them to varying degrees at that time. Obliged to maintain their currencies within the European partners were forced to follow the Bundesbank in maintaining (or in some cases even increasing) high interest. This was at the time when they desperately needed to lower interest rates as a method of stimulating economic growth and reversing rising unemployment.

It has been estimated that in 1994, the former East Germany received a least 176-billion deutschmarks in investment and income/pensions support of the 16-million population. This has been paid for from higher taxation levied on the citizens of what was West Germany, and by higher levels of unemployment in the other EC member states."

http://www.emperors-clothes.com/articles/carr/carr.html

Marie_Claude in reply to Sigfried1871

Jan 18th 2012 22:04 GMT

the ERM was already the rule in 1990 (even before), our currencies were pegged on the DM

"Exchange Rate Mechanism
Used prior to the adoption of the euro, a method for reconciling differing exchange rates between currencies, allowing participation in the single European currency. Established in 1979, it was known as a "semi-pegged" system in which currencies were variable with respect to each other only within a certain range. After the introduction of the euro in 1999, the exchange rate mechanism was replaced by ERM II, which reconciles exchange rates for countries wishing to join the eurozone"

see ya the euro was a old project

Hassene Akkeri

S&P downgrades, Fitch maintains, Moody's maintains.

I'm tempted to comment the irony behind the names here, but the situation is so serious.

The positive aspect of the current situation is that the complex correlation between "sovereign" politics, finance markets and behind the scene actors is now emerging and being exhibited under the astonished eyes of the masses.

I find surrealistic that a consultancy corporate is able by a simple score (no matter how professional and fair this rate is) to shake a domino board and affect the whole world's economy in consequence.

France's downgrade will affect its 2012 budget plan, orient its presidential race, harm countries that are tightly connected to its economy, and might be the fatal kick in the Euro's back.

Well, this is how the system is working. Globalized capitalism is a complex system where giant banks and corporates are by far more powerful than any political decider on this planet. The system is not necessarily "bad", but it certainly needs a from-the-inside reform to put more determinism, more clarity and more "democracy" in its engine.

If the capital finance sector is so powerful and decisive at a global scale, so it has to integrate the democracy process somehow. It has to take part of the political life in a transparent and declared way. Not through intensive lobbies.

French people, for example, have to understand that by electing a new president they're putting in office a kind of CEO who is (intentionally or not) led by a "shadow board of directors" that has the true decision power. This "shadow board" is formed by the giant banks and financial institutions. And these are the real behind the scene deciders.

Who are the members? What's the agenda?
No one knows. Yet, if the "elected" CEO tries to deviate the undeclared agenda, the board's super machine have enough mechanisms to take him out of the way.

A study by three systems theorists from the Federal Institute of Technology in Zurich shows that 147 firms control about 40% of the wealth on the planet through a complex holding network. A total of 737 owns 80% of it all.

Here's the Shadow Board. Non elected, quasi-unknown and uncontrolled. Who's talking about democracy?

Narainduth

S&P assessment is correct. If EU is to emmerge a strong and really unified group then the core problem of disparity among the various EU memberstates and varying levels of competitiveness will have to be addressed. The problem of indebtedness facing the EU memberstates is just one of the parameters in the equation. Europe needs some sort of a comperhensive marshal plan for the economy. It does have the means for such a plan. What is required is the political will to have it crafted and implemented.

devasagayam

S&P lost its relevance long back by colluding with Banks and investment Bankers. S&P did not identify weaknesses of organisations till the day they failed.
Their inactivity or outright lies certifying companies and banks as AAA till their bankruptcy lead to serious problems.
There is no trust left.
Sovereign countries have hidden strengths and weaknesses unlike commercial organisations.
The downgrade does not matter.

Bharat pp

To any of you who think that German's products are 'Quality'

Just today, VW made a recall of a large of cars - But only because it was publicised , and too many months after they made the same recall in litigious America.

Quality ?

sikko6 in reply to Bharat pp

"To any of you who think that German's products are 'Quality'"

There are some German products - like cars - designed for nouvou riche chinese and indians who buy them because they are expensive and can show off to other people that they are rich. Actually they are not that expensive at all compared to Italian top-end cars.

German cars do not mean quality. They are a bit more expensive than average "super-reliable" Japanese cars you buy. If you really rich, you don't buy German cars. If you drive yourself, buying reliable Japanese cars can reduce hassles of breakdowns. German cars are for nouvou riches!

Sigfried1871 in reply to Marie_Claude

thats what i am talking of. Your critized trade imbalances caused by the so called German Export overweight is not fair as most of German Exports counter imports from its european neighbours..its not Germany's fault that Anglos saxon gave up their industrial base blaming now others for their strong export oriented economies

Marie_Claude in reply to Sigfried1871

all excuses are good to cheaters, your merchandises were affordable because of the euro ! try to imagine what would have been the life of a Germany with its old DM while paying for Eastern Germany unemployment, a bet, I expect that Kohl wouldn't have implemented the DM on to eastern Germany then, but would have left her with it soviet style currency, while west german corporations would have delocated there for cheaper labor force, so, don't look further why western Germany abandonned the DM for the euro: because the costs would be shared by the whole community, indeed we paid higher interest for being in the EMU then !

Apart of that, German industry makes what the Germans did/do the best since decades, and we aren't entitle to copy them, or expect more spying incidents like Berry Smutny's !

Sigfried1871 in reply to Bharat pp

its not all about cars, chemistry, machinery and green tec..the famous Mittelstand is the backbone of German economy..these are SMEs with high innovation and strong entrepreneurship creating best quality niche products the world asks for..

sikko6 in reply to Sigfried1871

"its not all about cars, chemistry, machinery and green tec..the famous Mittelstand is the backbone of German economy.."

Without dirty cheap Greek peso euro, these german companies will vanish into mist. Only cheap currency keeps them in business.

Dogsi in reply to sikko6

Overstating hurts, not helps, your stance. Germany is an industrial power house and has been for centuries. German products are obviously of high quality. Stating that Germany would cease to be competitive simply because the price rose is ridiculous.

German companies would be LESS competitive but they would still have a large market for luxury products.

German_Econ in reply to Dogsi

German companies would be LESS competitive in the short term, but not in the medium and long term.

To understand that, I recommend you to read what Michael Porter, one of the brightest strategists of our times, thinks about strong, appreciated currencies and currency devaluations.

don't worry be happy

So ok - why is this subject under discussion at all.

It would seem that France has had nothing but positive repercussions from this downgrade.

Should we not be talking about the relevance of Standard & Poor's ratings?

And considering that - Has S&P junked Japan's bonds yet ?

enlisted

It's really a pity that this incident in New York probably changed who leads France during these important times.

It somehow doesn't seem right.

Marie_Claude in reply to enlisted

lots of people had interest that he disapeared from IMF first, then from the french political scene, and we'll know why in a decade, may-be ! So, if he didn't tell much of the events, might be that his life was on the balance too !

enlisted

Btw. Marie_Claude

Losing DSK in the way he was lost could prove to be even more profound now than earlier.

Imagine now after having lost the AAA Sarkozy had to face "financial expert" DSK in an election... would he have had a chance?

Now he is confronted with the socialist Hollande (who seems to be highly unpopular judging by French fora with the exception of that of "Libération") and Marine LePen.
Sarkozy might win again...

Vive_chimie in reply to enlisted

To enlisted:

If you think that M. Hollande is highly unpopular in France, I invite you to consult this collection of opinion poll results:

www.sondages-en-france.fr/sondages/Elections/Présidentielles 2012

where you will see that M. Hollande currently has a more than comfortable lead over M. Sarkozy in polls for both the first and second rounds of the presidential election here.

That of course might merely mean that M. Sarkozy is even more highly unpopular than is M. Hollande ... but it also indicates, at least to me, that noone else is more popular overall than M. Hollande is, at least amongst plausible presidential candidates.

M. Hollande's lead hasn't changed all that much for several weeks now. At present M. Bayrou seems to be gaining and Mme LePen is maybe gaining a bit, but within the statistical noise of these polls the position overall seems rather stable to me.

Intersting how the Green/Ecological candidate has almost no support - that's surely a huge help to M. Hollande.

Vive_chimie in reply to enlisted

To enlisted:

I replied to your remark about strangeness, but my reply seems to have disappeared. Maybe my use of the word "detest" in connection with M. Sarkozy was thought by someone to be a personal attack. So I shall try again.

I'm not at all surprised that M. Sarkozy is unpopular, since I don't like him at all. He's arrogant, he tells lies (knowingly, in my opinion), he is deceitful and much of his behaviour has been contemptible.

happyfish18

When the French economy is stripped bare like its favorite son DSK by outside forces, climbing out of the hole will not be an easy or pleasant experience.

enlisted

To my surprise I learnt a few years ago that the number one country spying on Germany (industrial espionage) is...

......FRANCE!

who would have guessed? I always thought it was the US who have hughe espionage facilities and left overs from the cold war in Germany (still operating of course) and basicly can listen into every communication in Germany.

Marie_Claude in reply to enlisted

l'ennui is that you haven't a precise argument outside what the biased Berry smutny told in the US Embassy (ie wikileaks) while promoting the german made within EU subsidies for Galileo !

--------------------

at the moment none knows who is going to win, as people aren't relying on their voting habits anymore, anyways, it will be one of the 4 : Marine LePen, Hollande Sarkozy, Bayrou. It seems that the socialist bobo plebe would like to vote for Bayrou (center-right)

BTW, DSK is having a new life, he is making conferences, the next will be in Cambridge

http://www.francesoir.fr/actualite/politique/le-retour-de-dsk-175105.html
Of course he would have had 1OO% of the support, not sure that the Germans would have had appreciated his expertise !

Prowler13 in reply to enlisted

Really? That is what I call trust between neighbours. Now, can you ask your source who is the number one country spying on France? For fariness sake I hope it's Germany.

I'm not sure, but could your source be WikiLeaks? Found there one article, those quotes are intersting:
''France is the Empire of Evil in terms of technology theft, and Germany knows it.''
''French espionage is so widespread that the damages [it causes] the German economy are larger as a whole than those caused by China or Russia,''

http://www.smh.com.au/technology/technology-news/france-top-at-stealing-...

Marie_Claude in reply to Prowler13

precisely, this sentence is from the famous Berry Smutny, hey Galileo was such a source of money for his firm !

The Germans that are in our firms as representatnts of sharehodings are spying too !

there's a concurrence between our countries for high technologies

sikko6 in reply to Prowler13

''France is the Empire of Evil in terms of technology theft, and Germany knows it.''
Not just from Germany. They steal from everywhere through paying or employing IP thieves. Then they claim that they reverse-engineered it!

sherryblack in reply to Prowler13

Germany also practises industrial espionage on a large scale and unlike France is willing to give it away to Russia for gas resources.

One can always trust France not to betray the West for Russia but Germany not so sure....

Sigfried1871 in reply to Marie_Claude

its not true, all the people who got colonized by france and england become their chance to free themslefs after WW2.

once i had to prolongate my card de sejour in ivory coast, the administration privileged my while waiting at the end of a queue of 20 Frenchman waiting befor me to get their paper, telling me people there would love the Germans as they tried to colonize the French as they tried to colonize them..just travell Arabia or Asia and you will here the same..

Marie_Claude in reply to Sigfried1871

Jan 18th 2012 22:38 GMT

and you find people from the Brits colonies that they'd preferred to be colonised by the French.

Germany lost her colonies in 1920, I bet that some Namibiens would say that they'd preferred the French to the Germans then

Now they have the Chinese, that replace progressively our enterprises, and guess what these Ivorians told to a TV reporter, that they preferred when they work for the French....

Though you will not find in EUrope a colony that would advocate that was a good time to be colonised by the Germans.

These countries got their freedom, it was the price that UK and France paid to the US for supporting our war

sherryblack in reply to Sigfried1871

"and Indians and Irakis are migrating to UK even Britain has been gasifying and and extincting them intheir great colonialpast."

That maybe because they know their own colonial history better and so don't fall blindly for every anti-British writer that tries to rewrite history using the usual tactics of half truths, distortions and outright lies .

But than again Germans fall very easily for propaganda as the events of 1930's showed . Must be the lack of critical thinking skills that makes them fall so easily for propaganda don't you think?

Why don't you read some scholarly research on the Bengali famine and the *Alleged* use of gas in mesopotamia?

BTW do German schools teach the truth that the Germans were the firs to use mustard gas in WW1?

sherryblack in reply to Sigfried1871

"but the winner is writing the history"

The winner writes the truth because unlike Germany, Britain, USA and France have centuries of a free press tradition due to centuries of unbroken democratic tradition.

While in Germany the narrative of Germany the victim is the narrative for WW1.

The Versailles myth is taken to new heigts. Do German schools teach the truth that after the Franco-Prussian war of 1870, Germany demanded and got reparations from France to the tune of billions of gold francs (a big chunk of France's GDP at that time).

Do they teach the truth that France paid reparations to Germany before the due date and does not wallow in self pity and victimhood about the "treaty of Frankfurt" unlike Germans who wallow in victimhood about "treaty of Versailles"?

Of course German schools don't teach this and you still think the winners write history? Nope the losers write history too.

PEN NAME

It's a worrying sign for France that its only politician who speaks sense and actually cares about France - Marine Le Pen - is regarded as a nutter at best, fascist at worst.

"Truth's a dog must to kennel; he must be whipped out"

segolas

"The ratings on Belgium and Estonia were also left alone."

Estonia has had a surplus for a while now. Does it count for nothing, S&P?

It's a charade.

FOlmos

Sir

Rating agencies like S&P have failed to antecipate all major crises since the early 1990s. With this less than bright track record taking them too seriously is akin to make plans based on the Maya doomsday predicted for December this year.

About Free exchange

In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts. Adam Smith argued that in a free exchange both parties benefit, and this blog's aim is to encourage a free exchange of views on economic matters.

RSS feed

Advertisement

Trending topics

Read comments on the site's most popular topics

Advertisement

Latest blog posts - All times are GMT
Neighbourly advice
From Babbage - 25 mins ago
Shades of grey
From Prospero - 26 mins ago
The battle to keep the FAA running
From Gulliver - 32 mins ago
Hail to the dragon!
From Cassandra - 48 mins ago
Bring on the lawyers
From Baobab - 1 hrs 52 mins ago
The markets still say Mitt
From Buttonwood's notebook - 2 hrs 2 mins ago
Coming up short
From Game theory - 2 hrs 39 mins ago
More from our blogs »
Products & events
Stay informed today and every day

Subscribe to The Economist's free e-mail newsletters and alerts.

Subscribe to The Economist's latest article postings on Twitter

See a selection of The Economist's articles, events, topical videos and debates on Facebook.