Moody's Blues: Concern Spreads over Slow Pace of French Reform

Moody's on Monday slashed France's top credit rating, becoming just the latest institution to cast doubt on the country's ability to reform its inflexible labor market and boost growth. French President François Hollande has promised change, but markets have yet to be convinced.

French President François Hollande is facing a difficult path forward. Zoom
AFP

French President François Hollande is facing a difficult path forward.

It turns out that French voters aren't the only ones who have begun to doubt President François Hollande. On Monday evening, the ratings agency Moody's also expressed concern about the path on which France currently finds itself as it attempts navigates its way through the uncompromising euro crisis. Moody's announced that it was downgrading French debt by a notch, becoming the second ratings agency after Standard & Poor's to revoke the country's AAA top rating. Like S&P, Moody's long-term outlook on French debt is negative.

The move highlights concerns that France, rather than Spain or Italy, could be the true danger lurking in the heart of the euro zone. And worries that Hollande, who has shown only half-hearted interest in pursuing far-reaching economic reform, might not have the political backing necessary to modernize the country's economy. Indeed, a poll released by the newspaper Le Journal du Dimanche on Sunday indicated that Hollande's popularity has now decreased for six months in a row and stands at just 41 percent.

In downgrading French debt, Moody's highlighted a host of challenges facing the country's economy, focusing specifically on what the agency called "multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labor, goods and service markets."

In addition, Moody's pointed to sluggish economic growth in France. The economy posted a surprising upward tick of 0.2 percent in the third quarter of 2012, but the outlook remains grim, with the International Monetary Fund forecasting minimal growth next year, hardly enough to relieve the country of its persistent budget deficit. Hollande has pledged to reduce the deficit from its current level of 4.5 percent to 3 percent next year and earlier this autumn passed what has been described as France's harshest budget in 30 years. But his government has also forecast 2013 growth of 0.8 percent, much higher than what most experts expect, making it seem unlikely that he will achieve his budgetary targets.

'Overly Optimistic'

Analysts at Moody's are also skeptical of the French government's growth expectations. "The rating agency considers the GDP growth assumptions of 0.8 percent in 2013 and 2.0 percent from 2014 onwards to be overly optimistic," the agency wrote in its report.

More to the point, however, are the structural problems facing the country. In a special report in its current issue, newsmagazine The Economist highlighted many of them. In particular, the magazine noted that the public sector in the country is bloated, consuming some 57 percent of France's gross domestic product, and debt has skyrocketed in recent decades from 22 percent of GDP in 1981 to over 90 percent today.

Moody's echoed the magazine by highlighting many of the rigidities in the French labor market in justifying its downgrade. It is "characterized by a high degree of segmentation as a result of significant employment protection legislation," the ratings agency writes. Combined with other factors, the result is a lack of innovation and competitiveness and persistently high unemployment.

Hollande has noted the need to boost growth and indeed has been one of the primary critics of German Chancellor Angela Merkel's focus on austerity as a way to combat the euro crisis. But the French president has not made labor market reform a priority. Though he has promised to push through measures to improve flexibility, he has also passed a number of new laws that would seem to counter that pledge. In addition to raising taxes on the country's top earners and on businesses, he has also pushed through a higher minimum wage and reversed a planned increase to the retirement age.

Poor Track Record

Even the International Monetary Fund is worried. In a report released earlier this month, the IMF noted that France's "loss of competitiveness predates the crisis, but risks becoming even more severe if the French economy does not adapt along with its major trading partners in Europe, notably Italy and Spain which, following Germany, are now engaged in deep reforms of their labor markets and service sectors."

In responding to the Moody's downgrade, the Hollande administration appeared to be pointing the fingers at former President Nicolas Sarkozy. French Finance Minister Pierre Moscovici said on Monday night that the downgrade reflects inaction on the part of the country's previous government. On Tuesday, he went even further. "The rating change does not call into question the economic fundamentals of our country, the efforts undertaken by the government or our creditworthiness," he said.

It is a sweeping denial and serves to conceal the fact that Moody's actually would seem to have little faith that France will rapidly change direction. "Moody's recognizes that the government recently announced measures intended to address some of (the) structural challenges (facing the country)," the ratings agency wrote. "However, those measures alone are unlikely to be sufficiently far-reaching to restore competitiveness. And Moody's notes that the track record of successive French governments in effecting such measures over the past two decades has been poor."

cgh -- with wire reports

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