The French Conniption
Jan 30, 2012, Vol. 17, No. 19 • By CHRISTOPHER CALDWELL
n the week since Standard & Poor’s downgraded the credit ratings of nine European countries, French newspapermen and European politicians have viewed it as a warning sign for … er … Britain. Either that or for the barons of American “finance capitalism” who doubtless put S&P up to the task. Or maybe Germany is to blame for running its economy in such a way as to escape sanction, thus throwing the European economic machine out of balance. Credit downgrades are a bit like diagnoses of alcoholism: Almost anyone would rather trash the doctor than go to rehab. President Obama’s advisers behaved no differently last summer when S&P, citing the impasse over the debt ceiling, removed the AAA rating of the United States for the first time in history.
Yet there is something particularly extreme about the French Conniption. President Nicolas Sarkozy had made his protection of France’s triple-A rating the centerpiece of next April’s election. His finance minister has raised questions about the timing of the downgrades. But this is preposterous. The market has its own system of “ratings”: interest rates. They show that France should count itself lucky with its double-A. Last summer, as worries over Greek solvency undermined the creditworthiness of Spain and Italy, France’s rates began to diverge from those of Germany. Germany was a safer country to lend to for two reasons: It had a more dynamic economy, and it had undertaken a grueling reform of its entitlement programs, of which France is still incapable. It had even enacted a balanced budget amendment. Germany’s constitution, moreover, gave investors reason to hope that a bailout of Greece was not just unlikely but illegal. France had none of that. And it was not the only AAA country to get evicted from Germany’s neighborhood—Austria did, too. Italy lost two notches in its credit rating, falling to BBB.
Similar reasons account for why France, despite more favorable debt and deficit numbers, is paying more to borrow money than Britain. Britain is not in the euro. France is. Whereas Britain can, in a pinch, print the money to buy its own debt, France cannot. If France buys anyone’s debt, it will be Greece’s. The daily Le Monde complains of a “Balkanization” of Europe by S&P. The ratings agencies persist in seeing different countries as posing different levels of risk, instead of taking at face value the propaganda emanating from Brussels about one-for-all-and-all-for-one. But in fact, Europe’s individual countries do have different risk profiles. Monetarily speaking, Britain is still a sovereign country in a way that France no longer is.
The downgrades will affect the debt crisis that now engulfs Europe, because they affect the EFSF, the continent’s bailout fund. The individual countries that belong to the euro have given it more than half a trillion dollars in guarantees for Greek and other European debt. Since the EFSF’s credit rating depends on the credit ratings of the countries that guarantee it, the fund was naturally downgraded in turn. For months now, European finance ministers have considered the EFSF inadequate. They have sought ways to leverage it up—in other words, to borrow off the individual nations’ guarantees. That is going to get more expensive to do.
Fund CEO Klaus Regling, eurozone head Jean-Claude Juncker, and European Council president Herman Van Rompuy doubt this. They note that the United States did not have to pay more to borrow in dollars after its own downgrade last summer. But they would say that, wouldn’t they? Even if the United States is not fit to give anyone lessons in fiscal responsibility, there is a difference between a reserve currency and a fund set up to buy the marked-down paper of the world’s slowest-growing economies.
The Europeans have been through this problem once already. Last winter, the EU’s AAA countries were told that because of a miscalculation they would all need to top up their contributions to the EFSF. The result? In last April’s election, the Finns gave a new Europe-hating party, the True Finns, 20 percent of the vote. In April, Sarkozy is slated to run against not just the anti-European National Front but also a Socialist party that has promised to rip up the debt agreements Sarkozy signed in December. Nor is France an exceptional case. You can look at what happened in Finland last year and expect that there is more where that came from.