Dialog with the Alter Ego on the S&P downgrade of France et al.., first drafted on Jan. 14, published on Jan. 16, 2012
Question by Alter Ego of Noah denkt™ (AE): This Friday, Standard and Poors announced that it would downgrade the debt credibility of nine European countries, including France, Spain, Italy and even Austria. What does Noah denkt™ make of this move?
Answer by Noah denkt™ (Nd): Well, they had preannounced that they would do something like this. So it really can’t come as a huge surprise to anyone that it has now happened. After all, it’s even we ourselves who had only last week suggested that a more aggressive reform agenda in Europe is necessary to put the EURO-project on a sound footing again. (see: www.noahdenkt.com/noahdenktwEURO16.html)
AE: But what do you make of the fact that Germany was not included in that wholesale downgrade?
Nd: That really is the interesting part in all of this. Obviously the interest rates which Germany is paying at this time make it next to impossible to downgrade it. On the other hand, it is also true that this country’s fate is so intimately connected to that of the EU in general that it is hard to see how Germany’s finances could come out unscathed if the EURO were in deed to crash. So, S&P really had a tough nut to crack her, didn’t they?
AE: In the end though, they decided to exempt Germany. Can’t this be read as an endorsement of the austerity-only approach which Germany has been preaching everywhere else in Europe? In other words, isn’t there a problem in S&P’s overall message if it strengthens the champion of austerity while telling everyone else that austerity efforts alone don’t do the trick?
Nd: S&P’s message in this would, in deed, be muddled, – (something along the line of: “Hey Europe, Germany’s economic ideas may work in Germany, but they aren’t good enough for the rest of you!”) -, if it weren’t for the fact that Ireland too was exempted from that wholesale downgrade which we saw on Friday. Because that exclusion of Ireland should show everybody else the way which they have to pursue in order to salvage their financial credibility.
AE: What’s so special about Ireland?
Nd: Well, Ireland, like Greece and Portugal was forced to accept European and IMF bailout money, and hence had to underwrite equally stern austerity budgets. Nevertheless they have managed this time around to stave off another downgrade. In other words, they must have done something right which others that are just as much in the eyes of the market have not been able to achieve.
AE: And what is it that Ireland has done different than Greece, Portugal, Spain and others?
Nd: Well, they have done a better job to maintain their competitiveness. They have kept their corporate tax rate at 12,5%. They have a labor law that, as far as we know, doesn’t provide the level of protection that Southern Europe’s employees enjoy. And they are generally less antic-capitalistic than their Southern European brothers are. That already changes the entire ballgame for them.
AE: But couldn’t it be a simple Anglo-American bias on the part of the rating agencies which explains this exemption of Ireland?
Nd: Okay, we certainly cannot rule out that some of that may actually influence S&P’s judgment here. But it would still be a mistake to not heed the message which they try to send here.
AE: And that message is: less labor protection, less bureaucracy and more room for entrepreneurial initiative?
Nd: That’s how we see this.
