France’s credit rating has been downgraded by Standard and Poor’s. The country is now rated AA versus AA+, previously. The agency also moved its outlook to stable, suggesting it sees less than a 1/3 chance of a further rating cut or an upgrade in the next two years.
What grounds did the agency give for its change of view on France?
Several points stand out from the Standard and Poor’s report.
1 – The French economy is robust and well diversified but no longer has the capacity to restore sustained strong growth. Before the crisis, the French economy used to grow at an average of around 2%, the nature of the economy working to drive the growth rate naturally toward this average.
This is no longer true. Years of crisis since 2007/2008 have altered business conditions and the French economy is no longer as able to revert toward 2% growth. Its trend growth has been impaired long-term, which is bad news for employment.
2 – Against this background, the agency stated that French economic policy has tended to focus on short-term rather than structural adjustments. In other words, steps taken, particularly on taxation, have been based on the assumption that the French economy would automatically return to its long-term growth rate. Standard and Poor’s considers that these measures have gone as far as they can with little more to be gained on this front. The country now needs to move to more structural measures to change the way the French economy works.
The agency notes that the CICE (tax credit for competitiveness and employment) and labor market reforms are steps in the right direction but need to be taken further to re-equip the French economy for the global economy.
3 – The agency also sees a reluctance to embrace structural reform because the unemployment rate is already high. Everyone is trying to hang on to what they have, and this could be threatened by any wide-ranging reforms and changes.
To mitigate this situation, a more transparent path in the right direction must be mapped out. The broad lines of such a strategy were sketched out by the government’s seminar on France in 2025 and by the CGSP (General Commissariat for Strategy and Foresight) on France in 10 years. But these plans remain confidential and do not represent a clear path forward.
For the moment, in the absence of any clear objective, the incentive for all players is to wait-and-see. As a result, the current data tend to induce paralysis.
4 – In other words, Standard and Poor’s are saying that the French economy is proving slow to recover an adequate long-term growth rate that would drive a sustained improvement in the labor market. This inevitably raises the question of how the French economy and social model can be made to fit the global economy. Standard and Poor’s simply states that changes made so far are not sufficiently radical but that the French economy has the capacity to meet these challenges. It is up to France to cross the Rubicon.
5 – What impact will the downgrade have?
The Standard and Poor’s downgrade looks more like a tweak than a sea change in the agency’s view of the French economy. The impact will be minimal but this is a warning sign that no-one can afford to ignore as, given the observed trend of French growth, the arguments cited come as no surprise.