Jan 17, 2012

Mass S&P Downgrade Will Help Further European Fiscal Consolidation

The analysts at S&P love the limelight. The timing of their announcements plus the multiple rumours and leaks (sometimes subsequently denied) seems to indicate so. But putting that aside, the mass downgrade issued on Friday has had a few interesting side-effects. Finally France has had to face the reality that there is only one regional superpower in Europe and it is not them. Also the revision of the outlook on Germany's credit rating from negative to stable has shown that the core is still strong and has probably contributed to the relative strength of the Euro. (As a large exporter Germany is the main beneficiary of the common currency - please refer to The Flip Side of Germany's European Bailouts).

The pundits have been quite negative on the "European experiment" in the aftermath. And admittedly the economic situation in the European Union certainly does not look rosy. But one should not forget that the Euro is first and foremost a political project. It is an attempt to bring a fractious continent together and avoid the political and military mistakes of past centuries. And sometimes the only way to push through painful reforms is when there is simply no alternative. By escalating the European credit crisis, rating agencies will ultimately help Europe on the path to harmonization of fiscal policies.

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