France downgrade widens Europe’s North-South schism

Brussels — The debt downgrade of France has widened a gulf between Europe’s North and South, leaving Paris politically weaker and Berlin stronger amid tough negotiations to resolve the eurozone crisis.

For months Germany, Europe’s top economy, has sought to impose its frugal philosophy on eurozone partners while French President Nicolas Sarkozy served as a counterweight to Chancellor Angela Merkel’s hard line.

Merkel "was already leading the dance in Europe on economic issues," a minister from a European country told AFP on condition of anonymity. "She will be able to do that even more now."

Although Sarkozy shares Merkel’s view that the eurozone needs to tighten budget discipline, the two leaders have not always seen eye-to-eye on how strict the new rules should be.

Germany’s fiscal orthodoxy is shared by the Netherlands and Finland, while France has counted on the support of southern nations like Italy to cool the fervour of their thrifty northern neighbours.

While the widely anticipated ratings cut may have a limited impact on the French economy, it could have a political price for Sarkozy now that his country is out of the exclusive club of AAA-rated nations.

January’s downgrade comes as the French leader, unpopular at home, faces a tough presidential election in a few months.

"Germany comes out as a clear winner and will have its position at the negotiating table strengthened even further," Royal Bank of Scotland analysts wrote in a note to clients.

"Likewise, France’s position at the European negotiating table is likely to be weakened vis-à-vis Germany. This might render future negotiations surrounding fiscal integration even more difficult," they wrote.

EU leaders agreed at a summit in December to write a new fiscal pact to deepen economic integration and reinforce budgetary discipline across the bloc, but governments are divided over the degree of automaticity of sanctions against deficit sinners.

France and other nations battled in recent negotiations to make sure that the new treaty would not give the European Court of Justice the power to sanction nations that violate the budget rules.

Germany and France have also clashed on the role of the European Central Bank, with Berlin rejecting French calls for the ECB to act as a lender of last resort to help distressed nations.

In addition, Merkel and her northern allies have been reluctant to increase their contributions to the eurozone’s bailout fund.

An EU official said the next summit promises to be even more complicated than usual following the S&P downgrade, which "sharpened the differences" between eurozone states.

With Austria also losing its AAA rating, only Germany, Finland, the Netherlands and Luxembourg remain in the club, giving the foursome the upper hand in the negotiations as EU leaders prepare for the January 30 summit.
"The cleavage between North and South in the eurozone is becoming more and more clear," the minister said.

With eurozone weak-link Greece struggling to reach a debt writedown with bank creditors, eurosceptics say the only solution is to expel fiscally impaired nations from the 17-state monetary union.

"We cannot afford to keep buying time with taxpayers’ money. Eurozone leaders must now face up to the reality that the eurozone disease will not begin to be cured until we remove the infected limb," said Martin Callanan, head of the European Parliament’s European Conservatives and Reformists group.

Frits Bolkestein, a Dutch former EU commissioner, said recently that "a eurozone breakup is inevitable" because of the huge gulf between North and South.

He called for the creation of a new monetary union limited to northern European nations, a "neuro-zone."

AFP/ Expatica