Downgrading Threatens Bailout Funds; Budget Talks Snarled
French President Francois Hollande can be grateful that the main opposition party, the Union for a Popular Majority (UMP), emerged battered and scarred from the cliffhanger leadership battle in which Jean-Francois Copé defeated the favored Francois Fillon by less than 100 votes out of 175,000 cast.
The results and the aftershocks partially drowned out the decision by Moody's Investment Service to cut France's credit rating from the coveted AAA. While the service took note of the French government's plans for reforms, it also noted that France does not have a good record in carrying them out. "Based on the track record of successive governments in implementing fiscal consolidation measures, Moody's will remain cautious when assessing whether the consolidation effort is sufficiently deep and sustained."
The credit downgrade is not only bad news for France, but for the entire Euro zone. The credit worthiness of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), the euro zone bailout funds, was also damaged.
France is a major contributor to these funds as the second largest European economy after Germany. It tends to reason that if a major component of the consortium is deemed less reliable, this could translate into higher interest rates that these funds will be called upon to pay investors. When we are talking about sums on the order of €500 billion, even a small hike in interest could prove significant.
Additionally, the European Union's finding negotiations on a seven-year budget are in an even more deadlocked position than last week. The president of the European Union, Herman Van Rompuy, came up with a compromise budget that slashed it by €80 billion more than originally proposed by the European Commission.
This was done in order to placate deficit hawks like Britain but the compromise immediately aroused French antagonism, as €25 billion of these cuts are at the expense of the Common Agricultural Policy of which France is a major beneficiary.
France had made a deal with Poland under which France supported the Cohesion Funds, of which the East European countries are the major gainers, in return for support on agriculture. France was joined in opposition to the budget by Spain, that having had to make savage cuts on its own budget, wants an expansionary European Union budget to stimulate regional growth. Spain is a beneficiary of both the Common Agricultural Policy and the cohesion funds.