The American Interest
Analysis by Walter Russell Mead & Staff
New Signs of Eurofail as Sarkozy Preps For Downgrade

The European situation continues to worsen as embattled French President Nicolas Sarkozy begins to soften the voters up to expect the loss of France’s AAA credit rating.  From Reuters:

In an interview, Sarkozy told Le Monde newspaper the loss of the AAA status — a grade that allows France to finance its debt as cheaply as possible — could be overcome and that he would respond “with a cool head” if it happened.

Ratings agency Standard & Poor’s has put France under review for possible downgrade along with 14 other euro zone countries and Moody’s is also reappraising France’s rating as a result of the debt market crisis in Europe, also raising the specter of a downgrade.

“It would be one more difficulty, but not insurmountable,” Sarkozy said.

The assumption is that Sarkozy wouldn’t be telling voters not to worry about the consequences of a downgrade if he didn’t believe a downgrade was in the works.

The ratings downgrade, if it happens, won’t just be bad news for France.  It effectively torpedoes the much ballyhooed European Financial Stability Fund, hailed for months in Brussels as the wonder-working, expandable cure-all that would solve the eurozone’s problems.  If France doesn’t have a triple A rating, the EFSF can’t have one either, and one credit risk can’t go surety for the debts of another.

Meanwhile, Sarkozy trails badly in the polls and his likely successor François Hollande is telling all and sundry that the deal Sarkozy made last week in Brussels stinks and that if he, Hollande, is elected, he will rip it up and get a better one.  That may just be empty rhetoric as Angela Merkel is a tough lady to move, and she’s the one with the money.  Still, it’s one more sign that the European political process is getting less coherent not more so as the continent approaches the next stage of the crisis.

Published on December 12, 2011 10:47 am
  • http://www.smallbusinessrev.com Marty

    Is it me, or are we witnessing an exponential increase in political posturing commensurate with our inability to actually solve basic problems?

  • Kevin

    Interesting.

    I thought Hollande was a she, not he.

  • JDW

    So, the French plan on turning things around by throwing Sarkozy out and electing a commited, career Socialist in Hollande? WTF!

  • realtat

    Kevin,Maybe you are thinking of Martine Aubrey, another socialist.

  • Charles R. Williams

    If French banks are highly leveraged, too big to fail and invested in Italian public debt, then Italy’s debts are France’s debts. The same argument applies to Germany with respect to France’s debts and Italy’s debts. This is a tsunami that cannot be stopped with sandbags. The Europeans cannot stop the contagion by papering over reality. On the other hand a AA credit rating is not a catastrophe for France and even for Germany.

    What is needed is a restructuring of European banking that permits any nation to default on its debt without dragging down the others. Until this happens unsustainable government spending in certain nations will continue and every nation’s credit ratings will decline.

    Austerity in Europe is inevitable and the longer it is delayed the more painful the adjustments will be. The unresolved question is how much of the pain will be born by German taxpayers. This is the real dispute underlying all the phoniness and posturing.

  • teapartydoc

    Whenever these sorts of things begin to happen one must realize that entrenched interests are being protected at the expense of the nation or confederacy as a whole. Reform does not happen because of how powerfully those interests are entrenched, and they probably had a hand in making up the rules of the game either in the first place, or at least transformed them to suit their needs over the years. Reform eventually occurs as a result of crisis. It is the ability to see the need for reform and act on that need proactively that Hamilton referred to as the ability to alter constitutions by reflection and choice rather than by accident and force. The leadership in Europe are not truly engaged with the problem, but rather with the interests. Things are not looking good.

  • http://SenatorMark4.org SenatorMark4

    I predict they’ll be able to stall off any major catastrophe until January and then the Mayan predictions will start looking pretty prescient. Just think, 150 years of advances in the Western world will be zeroed out in just a few decades of socialist experimenting.