21st Mar 2018

France stripped of another top rating

  • France's economic outlook is getting grimmer (Photo: Moyan Brenn)

Moody's on Monday (19 November) became the second ratings agency to strip France of its top rating, citing continued economic woes and lack of competitiveness, a blow to President Francois Hollande who tried to fix the problem with higher taxes.

The downgrade of the French government's projected capacity to pay back its debt comes after Standard&Poor's in January - still during the presidency of Hollande's predecessor Nicolas Sarkozy - was the first of the three top rating agencies to slash France's triple-A status.

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Moody's said the move was due to France's "sustained loss of competitiveness" and "long-standing rigidities of its labour, goods and service markets."

The International Monetary Fund earlier this month also warned France it may fall behind Italy and Spain on labour market reforms and competitiveness, as French exports are shrinking compared to other eurozone countries, especially Germany.

A report commissioned by the French government and drafted by industrialist Louis Gallois issued a similar warning, suggesting "shock therapy" was needed to bring down labour costs and re-balance the economic relationship to Germany.

French finance minister Pierre Moscovici on Monday said the downgrade "does not put into question the fundamentals of the French economy and is a motivation to pursue structural reforms."

Elected on an anti-austerity ticket, Socialist President Francois Hollande has sought to avoid harsh social welfare or wage cuts. In a reforms package passed in earlier this autumn, the main measures were tax hikes for the rich and on capital gains by companies.

An internet movement called "the pigeons" warned that the new taxation is stifling investments in start-ups and small enterprises succeeded in rolling back some of the measures.

Hollande also sent his German-speaking Prime Minister, Jean-Marc Ayrault, to Berlin for talks with Chancellor Angela Merkel. In a joint press conference last Thursday, the two seemed to be singing for the same hymn sheet. They agreed more reforms are needed and that France has to boost its competitiveness. Ayrault said Paris remains fully committed to bring down the budget deficit to 3 percent of GDP by next year.

Merkel, for her part, said she was not going to "give grades" to France on its reforms, even though Berlin is "observing" what is going on there.

She also said that the Franco-German relationship was above the rival political families their two leaders are from. It was "normal" for the French Socialists to support her challenger in next year's general elections, just as she had supported Nicolas Sarkozy who lost to Hollande.

"Once elected, however, we are all working very well together, this is something we have practised for decades," Merkel said, noting that Jacques Chirac and Helmut Kohl had also hailed from different political parties.

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Angela Merkel - who started her fourth term as Germany's chancellor earlier this week - is wasting no time on big issues like eurozone reforms. On Friday she is meeting Emmanuel Macron where the two will seek common ground.

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