Moody’s cut France’s credit rating by one notch to Aa1 from the previous top rating of Aaa, saying that its long-term economic growth outlook was negatively affected by “multiple structural challenges,” its fiscal outlook was uncertain and resilience to future shocks from the euro area was decreasing.
The move reversed Monday’s strong rally in stock markets, with most indexes in the red Tuesday morning.
In a research piece under the headline “France is the euro’s next victim,” Eimear Daly, foreign exchange analyst at Monex Europe, said that the country would not have been downgraded if it hadn’t been a member of the single currency area.
“If France had its own currency, the nation would be able to devalue and hence retain the competitiveness which is damaging its economic outlook,” Daly said.
The rating agency admitted that membership to the eurozone was part of the reason for the downgrade, as it was limiting France’s ability to become more competitive internationally by devaluing its currency.
The agency said the country’s structural economic challenges are persistent and include “rigidities in labour and services markets and low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.”
“The rise in France's real effective exchange rate in recent years contributes to this erosion of competitiveness, in particular relative to Germany, the UK and the US,” Moody’s said in a statement explaining the rationale behind the ratings downgrade.
“The challenge of restoring price-competitiveness through wage moderation and cost containment is made more difficult by France's membership of the monetary union, which removes the adjustment mechanism that the ability to devalue its own currency would provide.” Daly said that euro nations in effect manage their economies with one hand tied behind their back, and that the painful and drawn-out nature of structural reforms is hard to stomach for electorates in these countries.
“The monetary discipline of the euro project was supposed to make us all stronger economies that would tackle head-on the structural issues in our economy instead of taking the easing monetary route,” she said.
“The principle is great but the reality is a disaster.”
Moody’s acknowledged the French government’s recently announced measures to tackle some of the structural challenges the country was facing, but said they were not “sufficiently far-reaching to restore competitiveness.”
It also said it considered the French government’s forecast of 0.8% economic growth for next year and 2% for 2014 as “overly optimistic.”