In the wake of the collective downgrading of 9 eurozone countries, including France, it’s become clear that the EU’s policy of rescue funds coupled with fiscal austerity has exhausted itself. It’s time for Angela Merkel and her partners to find a credible outcome, writes Wolfgang Münchau.
At the end of a briefly euphoric week, reality caught up.
On one level, Friday’s news was not really surprising. The French rating downgrade was a shock foretold. As was the breakdown in talks between private investors and the Greek government about a voluntary participation in a debt writedown. A proposition that was unrealistic to start with has been rejected. We should not feign surprise.
And yet both events are important because they show us the mechanism behind this year’s likely unfolding of events. The eurozone has fallen into a spiral of downgrades, falling economic output, rising debt and further downgrades. A recession has just started. Greece is now likely to default on most of its debts and may even have to leave the eurozone. When that happens, the spotlight will fall immediately on Portugal, and the next contagious round of downgrades will begin.
Europe’s insufficient rescue fund, the European Financial Stability Facility, now also faces a downgrade because it had borrowed its ratings from its members. The way the EFSF is constructed means that its effective lending capacity will thus be reduced. Even though the French downgrade did not come as a surprise, the eurozone member states have no plan B for this, just a few stopgap emergency scenarios. They may decide to run the EFSF and its permanent successor concurrently. They may also provide the latter with a full immediate allotment of its capital. But this will create gaps in national budgets in a bad year.
By downgrading France and Austria but not Germany and the Netherlands, Standard & Poor’s also managed to shape expectations of the economic geography of an eventual break-up. A downgrading of all triple A rated members would have been much easier to deal with politically. Germany is now the only large country left with a triple A rating. The decision will make it harder for Germany to accept eurozone bonds. The ratings wedge between France and Germany will make the relationship even more unbalanced. Read full article in Financial Times – registered users... Source
COUNTERPOINT
An anti-democratic intrusion
The far-reaching downgrade of nine Eurozone countries by Standard & Poor's is "as cheeky as it is contradictory," says German dailySüddeutsche Zeitung. "A monopoly is throwing stones at the policies of democratically elected governments," the paper says, calling for greater responsibility from these "self-appointed reviewers". For the paper:
The agency has launched its message, which no one had asked for, at the right time, two weeks before the next EU summit: 'Do as we tell you. You have no choice.' It has not hesitated to put the euro club at the same level as developing countries. Whoever lends money to Italy or Spain runs the same risk as if the money were sent to India, to Columbia or to the Bahamas. That is absurd, it is ridiculous. [...] But there is something more dangerous. Standard & Poor's [...] is trying to intervene directly in European policy. That is not the job of a rating agency. The Americans are pushing continental Europeans more and more to adopt Anglo-American principles in their economic and financial policies. In other words, to print money when needed in order to save banks and to initiate stimulus programmes. Whoever does not do so gets a bad rating.