Following the decision by rating agency Standard & Poor's to downgrade the ratings for nine euro-zone countries, pressure is likely to increase on Germany, the country long viewed as a model during the crisis, but also the one that holds much of the money that is needed to solve it.
In its decision on Friday, S&P stated that Germany's rating is in excellent condition, but experts in the country fear that Berlin's contributions to the euro bailout will have to be considerably greater than initially planned. And Chancellor Angela Merkel of the conservative Christian Democratic Union (CDU) said the downgrade of the nine countries will increase pressure for all the euro-zone countries to solve their budget and debt problems.
After a meeting of CDU leaders on Saturday, Merkel said, "We are now challenged to implement the fiscal compact even quicker ... and to do it resolutely, not to try to soften it." Merkel was referring to the deal agreed in December by 26 European Union member states, with the exception of Britain, to enter into a fiscal pact that would see consolidated budget legislation in all countries and sanctions for violaters. The move by S&P, she said, had not come as a surprise. "We have taken note of this decision," she said. Merkel also noted, however, that "S&P is just one of three ratings agencies."
Frank Schäffler, the finance policy spokesman for the Free Democratic Party (FDP), Merkel's junior coalition partner, said he felt his criticism of Germany's participation in the European Financial Stability Facility (EFSF), the current euro bailout fund, had been indirectly confirmed by S&P. He said the downgrading was likely to have direct consequences for Berlin. The downgraded rating for Austria alone, he told the financial daily Handelsblatt, would mean that "Germany would no longer just have to carry 40 percent, but close to 75 percent (of the burden) to ensure the euro bailout fund EFSF retained its AAA rating."
He said the current German guarantee of €211 billion would no longer be sufficient in order to achieve the volume of aid that had been originally planned. "Over time, that will also impose a burden on the German rating," the FDP politician warned, saying that the "socialization of losses" through the bailout fund could not go on forever.
But during her press conference on Saturday, Merkel sought to downplay worries about the ratings loss. "I was never of the opinion that the EFSF necessarily has to be AAA," Merkel said. "AA+ is also not a bad rating." She added that the "work of the EFSF will not be torpedoed" by the downgrade.
Opposition Calls for Germany to Halt Planned Tax Cut
The center-left, opposition Social Democratic Party (SPD) is using the downgrade to call on the government to cancel tax cuts it is currently planning. "The downgrade is a warning shot for Germany that cannot go unheard," a senior SPD member of parliament, Thomas Oppermann, said on Saturday in Berlin. "It also threatens to create additional burdens for Germany in the scope of the euro bailout fund," the SPD politician stated.
In Berlin, the Finance Ministry rejected the objections, with a spokesperson stating that the austerity measures that had already been passed would stabilize the finances of the euro zone in the longer term. "Our recent experience has shown that the markets have already taken positive notice," the spokesperson said. On Thursday, Italy and Spain completed successful bond auctions at considerably lower interest rates than the kinds of yields the countries had seen in recent weeks. European Central Bank President Mario Draghi even said it indicated "tentative signs of stabilization" for the region. And Luxembourg Prime Minister Jean-Claude Juncker, chairman of the Euro Group which represents the 17 euro-zone countries, also pointed to progress that has been made with reforms.
In the private sector, some expressed anger over S&P's decision. "In light of the wide-reaching reforms in many crisis countries within the euro zone, it is not justifiable," said Rolf Schneider, deputy chief economist for German global insurance giant Allianz. He said major progress had been made at the December EU summit where the fiscal pact had been agreed to.
S&P Expresses Disappointment over EU Leaders
On Friday, S&P issued downgrades for Italy, Spain, Portugal, Slovakia, Slovenia, Malta and Cyprus as well as France and Austria, which lost their AAA ratings. S&P officials said that European politicians hadn't done enough to contain the debt crisis. The ratings agency said it had also been disappointed by the results of December's EU summit. The S&P experts warned "that credit availablility and economic growth might decelerate" in the euro zone. It added that European politicians were still divided over the correct approach to solving the crisis.
In France, the euro-zone's second-largest economy, the opposition has taken the downgrade as an opportunity -- coming as it does three months before the French go to the polls to elect their next president -- to sharply attack President Nicolas Sarkozy. Francois Hollande, the Socialist Party's (PS) candidate for president, accused the government of failure. "Nicolas Sarkozy declared the triple-A rating to be the goal of his politics and also a condition for his government," the politician said during a press conference in Paris.
Only Four Euro-Zone Countries Still Retain AAA Ratings
In an interview given to French public TV station France 2 on Friday night, Finance Minister Francois Baroin sought to minimize the potential damage. "It is not the ratings agencies that dictate France's policies," he said. He also called on people to remain calm, stating that while losing the AAA rating is not good news, "it is not a catastrophe." France retains an excellent rating, he said.
S&P now considers the outlook to be negative for 14 countries, even if some managed to escape a downgrade this time. The rating agency stated there is a one in three chance that those countries would be downgraded this year or next. Besides Germany, Slovakia is the only other country in the euro zone with a stable outlook, according to S&P.
In early December S&P, the United States' largest ratings agency, placed ratings for the euro-zone states under greater scrutiny. After Friday's decision, the only remaining euro-zone countries that still possess the top AAA rating are Germany, the Netherlands, Finland and Luxembourg.