France loses top credit rating

There has been plenty of speculation that France may become Europe’s next economic basket case. The Economist, for example, last week declared France a “time bomb at the heart of Europe.” The French government responded by calling the Economist’s crtique “sensationalist journalism” and claiming that it lacked “even-handedness.”

However, Moody, presumably an even-handed, non-sensationalist outfit, has just downgraded France’s credit rating. It lowered the rating one notch, from Aaa to Aal.

Moody explained that France’s long-term economic growth had been hit by its inflexible labor market and low levels of innovation which are eroding its competitiveness and industrial base. It also noted France’s exposure to the continuing eurozone crisis.

France’s new Socialist government, through Pierre Moscovici, the finance minister, blamed the economic management of past governments for the downgrade. However, it’s clear enough that Moody’s lacks confidence in the Socialist government’s ability to tackle France’s economic problems. Indeed, if Moody’s is correct that France’s long-term economic growth is stymied by “inflexible labor markets and low levels of innovation — and I don’t think there can be much doubt about this — then a Socialist government is just what the doctor didn’t order.

Meanwhile, France’s main opposition party, the conservative UMP, has just endured a bitter fight over who will succeed Nicolas Sarkozy as its leader. Jean-Francois Cope appears to have defeated former Prime Minister (under Sarkozy) Francois Fillon by a mere 98 votes out of more than 170,000 cast.

In the short term, the bitter and disputed election may be a blow to unity within the UMP. In the long term, it signals a turn to the right by the UMP. In Cope’s words, it means a French conservative party “without complexes,” or, more realistically, fewer of them. That’s something to which the United States should aspire.

Under Cope, the UMP may be better able to minimize the extent to which French conservatives embrace the far-right, ultra-nationalist Front National party of Marine Le Pen. But this remains to be seen. The UMP, the Front National, and the Socialists will not face French voters until 2014, and then only in elections for mayors, regional officials, and European Parliament lawmakers.