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Austerity Fails: Eurozone Countries in Mass Downgrade

Fiscal Austerity: 'Becoming Self-Defeating'

- Common Dreams staff

The Guardian today: Europe has been plunged into a fresh crisis after France was stripped of its coveted AAA credit rating in a mass downgrade of nine eurozone countries by the ratings agency Standard & Poor's.

France’s newspapers were full of doom and gloom on Saturday, with many focusing on the fact that Germany had managed to hang on to its top rating while France had been kicked out of the premier league. Liberation's front-page headline left the 'A' out of Sarkozy after France lost it's AAA rating. S&P said austerity was driving Europe even deeper into financial crisis as it also cut Austria's triple-A rating, and relegated Portugal and Cyprus to junk status.

Paul Krugman of the New York Times writing on his blog this morning:

S&P’s downgrade of a bunch of European sovereigns was no surprise. What was somewhat surprising — and which went unmentioned in almost all the news stories I’ve read — was why S&P has gotten so pessimistic. From their FAQs:

We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

And today we read about the response:

German chancellor Angela Merkel has called on eurozone governments speedily to implement tough new fiscal rules after Standard & Poor’s downgraded the credit ratings of France and Austria and seven other second-tier sovereigns.

Still barreling down the road to nowhere.

 

* * *

Helen Lewis-Hasteley writing in the UK's New Statesman:

France lost its AAA rating -- the highest possible -- and moved to AA+, as did Austria, while Portugal and Cyprus were downgraded to junk status. Italy, Spain, Malta, Slovakia and Slovenia also saw their ratings cut.

S&P said that its decision reflected the fact that austerity "risks becoming self-defeating". Markets fell on the news, with the FTSE closing 26 points down at 5636.

Britain still has a triple-A rating from Standard & Poor's, which has caused some adverse comment by Eurozone politicians. Michael Fuchs, deputy leader of Angela Merkel's Christian Democrat party, said: "Standard and Poor's must stop playing politics. Why doesn't it act on the highly indebted United States or highly indebted Britain?"

The decision will cause a headache for French president Nicolas Sarkozy, who is running for re-election this year. Today's Libération had some fun at his expense (click here for their front page).

Yesterday's Guardian live blog provides a helpful summary of all the major developments, while Samira Shackle blogged in December about S&P's threat to downgrade all 15 eurozone countries, and why that matters.

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