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November 20, 2012 5:50 pm
France’s socialist government on Tuesday hit back at Moody’s over the latest downgrade of the country’s sovereign debt rating, rejecting doubts about its own policies voiced by the US rating agency.
The removal of France’s top-ranking triple A rating by Moody’s, which followed a similar move by Standard & Poor’s in January, was mostly down to “the situation we inherited” when the government took office in May, said Pierre Moscovici, the finance minister.
But he added: “It seems to me that some of the criticism was too strong or was ill-timed. I would have preferred it if [Moody’s] had given more credit to the courageous reforms we have announced.”
A striking feature of Moody’s decision was the emphasis it placed on concerns that France was not sufficiently grasping the nettle of structural reforms needed to regenerate the economy and reverse its declining competitiveness.
Whereas S&P had stressed the impact on France of the wider eurozone crisis in its downgrade decision, Moody’s said: “The first driver is the risk to economic growth, and therefore to the government’s finances, posed by the country’s persistent structural economic challenges.”
It somewhat deflated recent measures, trumpeted by the government as unprecedented and profound reforms, by saying they were “unlikely to be sufficiently far-reaching”, especially given the “poor” record of previous governments.
For good measure, it said the government’s growth assumptions, including the expectation of a return to 2 per cent growth from 2014, were “overly optimistic”.
This was not what Paris wanted to hear when it was trying to persuade its own sceptical leftwing supporters to back reform measures, including a €20bn tax break for business to lower the cost of labour, and a tough budget programme for which President François Hollande’s anti-austerity election rhetoric scarcely prepared them.
Moody’s also picked out other sensitive areas requiring reform, namely “the longstanding rigidities of [France’s] labour, goods and service markets”.
Mr Moscovici has previously made reference to potential moves to increase competition in restricted sectors such as transport and retail, but the government has yet to put forward proposals. Its immediate focus is on labour market reforms, the subject of tense negotiations initiated by the government between employers and trade unions and scheduled to be completed by the end of the year. Laurence Parisot, the head of Medef, the employers’ federation, warned on Tuesday that she would not sign any deal that did not include an acceptance by the unions of the principle of “flexibility”.
Both the government and the unions have refused to use the word – despite a reduction in legal restraints on hiring and firing and greater leeway for businesses to negotiate working time and pay being at the core of the talks.
“I am worried to see that on the union and government sides they find it hard to understand that flexibility would be a major asset for the country’s competitiveness and for employment,” Ms Parisot said.
Failure to reach agreement would be “viewed very badly by the markets – all investors are watching these negotiations”, she said.
Mr Moscovici’s irritation with Moody’s criticism reflected a feeling on the government’s part that it was not being given enough credit for the steps it was taking.
Mr Hollande has a solid parliamentary majority and faces a new leader of the conservative UMP opposition in Jean-François Copé, handicapped by the fallout from a fraught leadership election that split the party. But Mr Hollande is having to tread cautiously to avoid splits on his own side, which includes many on the left unhappy about what they perceive as a liberal reform agenda.
Increasingly, the government is pleading to be given more time to prove its reform credentials. “We ask to be judged on our results,” Mr Moscovici said.
The subdued market reaction to the Moody’s action on Tuesday came as a relief in Paris. But the downgrade nonetheless increases the onus on Mr Hollande to deliver the reforms he has now embraced.
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