To no one's surprise, S&P downgraded the debt ratings of 9 European countries last Friday. France lost its coveted AAA rating, which won't help President Sarkozy's re-election bid. Italy now holds the same BBB+ rating as Ireland, the lowest rating that is still investment grade.
S&P cited a host of factors -- Europe's weakening economy, tightening credit conditions, the higher interest rates many government face, de-leveraging by both governments and households as well as an "open and prolonged dispute over how to address the challenges" Europe faces.
Less prominently mentioned but no less important was S&P's statement that the largest underlying issue is the gap in competitiveness between the different European economies, a gap that has widened since the introduction of the Euro. In short, the counterpart of the current account deficits run by the European "periphery" countries is the current account surplus run by "core" countries. Can't have one without the other... And, this crisis will not be surmounted unless the periphery countries become more competitive in addition to addressing their budget issues.
S&P cited a host of factors -- Europe's weakening economy, tightening credit conditions, the higher interest rates many government face, de-leveraging by both governments and households as well as an "open and prolonged dispute over how to address the challenges" Europe faces.
Less prominently mentioned but no less important was S&P's statement that the largest underlying issue is the gap in competitiveness between the different European economies, a gap that has widened since the introduction of the Euro. In short, the counterpart of the current account deficits run by the European "periphery" countries is the current account surplus run by "core" countries. Can't have one without the other... And, this crisis will not be surmounted unless the periphery countries become more competitive in addition to addressing their budget issues.
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