The American Interest
Analysis by Walter Russell Mead & Staff
France vs. Moody’s: Fight!

As we pointed out yesterday, Moody’s downgrade of France was notable for its singling out of France’s structural problems and weak reform efforts as a cause for concern rather than the broader eurozone climate the country finds itself in.

Today, Paris pushed back, with finance minister Pierre Moscovici claiming the downgrade was mostly due to “the situation we inherited” from the previous government. “It seems to me that some of the criticism was too strong or was ill-timed. I would have preferred it if [Moody’s] had given more credit to the courageous reforms we have announced.”

France finds itself between a rock and a hard place on this one. As the FT analyzes, the Moody’s report…

[...] somewhat deflated recent measures, trumpeted by the government as unprecedented and profound reforms, by saying they were “unlikely to be sufficiently far-reaching”, especially given the “poor” record of previous governments.

For good measure, it said the government’s growth assumptions, including the expectation of a return to 2 per cent growth from 2014, were “overly optimistic”.

This was not what Paris wanted to hear when it was trying to persuade its own sceptical leftwing supporters to back reform measures, including a €20bn tax break for business to lower the cost of labour, and a tough budget programme for which President François Hollande’s anti-austerity election rhetoric scarcely prepared them.

Moody’s thinks the French government is overestimating growth, failing to adequately reform its labor market, and is operating under rosy budget scenarios that won’t come true. The unions and the left, important stakeholders in President Hollande’s ruling coalition, think he’s already gone too far.

The prospect of a major crisis in france in 2013 is real and it would end the period of relative calm in world financial markets we’ve been ‘enjoying’ lately. We will keep an eye on this one as it develops.

Published on November 21, 2012 9:00 am