Why Does Sarkozy Care What S&P Says?
French President Nicolas Sarkozy was so worried about France’s AAA bond rating that he decided last year to run the French economy in accordance with the standards set by McGraw-Hill subsidiary Standard & Poor’s. Even as the probability increases that the precious rating will be lost, he continues to call for austerity. That decision to continue on the austerity path will hurt millions of French people. Why then is Sarkozy hell-bent on allowing an idiot checklist to determine the scope of the French response to past and predicted disasters?
It isn’t that hard to game the S&P sovereign credit ratings. The standards are available online, and apparently the people at S&P are available by phone to discuss the likely impact of policy choices, just as they were when the unelected representatives of McGraw-Hill downgraded the US. One thing that contributes to the French problem is that it is not sovereign in its own currency, a factor that could by itself lead to a downgrade. Paragraph 11, p. 4. So, as EU member states like Greece, Italy, and Spain weaken, the Euro weakens, and that affects the French rating.
Last November, in the face of a declining economy, Sarkozy installed a second round of austerity cuts, including an increase in the VAT, the national sales tax, from 5.5% to 7% on a number of items (thankfully not duck liver pâté), increasing taxes on the largest French corporations, and increasing the capital gains tax on second homes and homes held for investment. The retirement age will be moved up at a faster rate than originally scheduled. The plan does not, however, call for cuts to social programs, such as health care and pensions.
There is a sort of bi-partisan agreement on the need for austerity. The Socialist Party, currently leading in the polls for the election this April, is on board with the idea of austerity, if not the details. In fact, several articles quote leading members talking up an even larger austerity package, which will include significant cuts to social programs. Hollande talks a good game:
“Let’s not forget that since the beginning of Nicolas Sarkozy’s term, 75 billion euros in tax revenues were lost due to tax breaks given to large firms and wealthy households. It would have been legitimate to recoup some of these first, given that they have yielded no tangible benefit to the real economy.”
That idea of recovering “some” of the useless tax cuts sounds about as sincere as the calls of President Obama for an end to the Bush tax cuts for the rich.
It isn’t the workers of France who care about the AAA rating. One sign at a recent rally made the point: “To hell with the national debt. We’ll give them nothing and we don’t give a damn about their AAA!” I assume the corporate leaders of France agree with Sarkozy, but I don’t see any public discussion. Almost all French corporate and political leaders go to the same schools and they seem to see things the same way. None of them sees a connection between austerity and deepening economic problems. They call for more cuts as unemployment reaches a five-year high, and projections for growth for this year fall from 1.75% to below 1%. A real socialist might think that the goal of French business elites is to cut the wages of French workers.
Meanwhile, it isn’t clear that the AAA rating matters anyway. France did quite well in its last bond auction, leading one to wonder whether the opinions of the credit rating agencies are relevant to anyone besides the French elites. Of course, the record of the credit ratings agencies speaks for itself.
It may be that part of the answer is that the credit rating agencies have made it clear that in order for the European Financial Stability Facility to maintain its AAA rating, France and Germany must retain theirs. The EFSF is part of the system rigged up to deal with the Eurozone financial problems. It has the power to raise money through debt issues guaranteed by members of the EU, and lend it to governments, buy sovereign debt, and recapitalize banks. France has made substantial guarantees to the EFSF.
It looks like the basis of French austerity is its participation in the Euro. In turn, the stability of the Euro is dependent on the feelings of a bunch of unelected Americans from companies that have missed every important financial event since forever.