It took Moody's Investors Service nearly a year to come to the same conclusion Standard and Poor's reached on France last January: That one of Europe's standard-bearers no longer warrants a top-notch debt rating. But with 10 months more muddy water under the euro zone's bridge, the bond rating giant is placing a big share of the blame not on the European Union's debts, but on its very design.
In lowering France's government bond rating one notch, to Aa1 from Aaa, Moody's focused squarely on the economic deterioration that engulfs the country, which is a central casualty in the Europe-wide recession. The weak economic outlook has not only made France's ability to keep its government budgets under control "uncertain," Moody's said, but it has made the country less able to weather further "euro area shocks" – code for sovereign-debt crises.
This is a shift in tone from S&P's downgrade earlier in the year, which mostly focused on the EU's inability to resolve the sovereign debt mess – leaving France, along with numerous other EU countries, exposed to serious credit risk. Those sovereign threats haven't entirely gone away, but while they also have almost certainly eased over the past 10 months, they have been overtaken by potentially deeper and longer-lasting economic problems.
Pointedly, Moody's identifies the EU structure itself as an increasing burden on France's ability to address its own economic woes. It says the country's long-term loss of competitiveness, a contributing factor in the downgrade, has been exacerbated by the fact the country is in the euro – it can't adjust its exchange rate to reflect its relative competitiveness with trading partners. France is forced to address its global price-competitiveness instead by other means, such as cost-cutting and wage reductions – both of which are a drag on economic growth.
Moody's also notes that, as a large member of the EU, France's obligations to other members is disproportionately large – and it no longer has its own national central bank to turn to, should it need to finance its own debts "in the event of a market disruption."
When euro watchers have talked about members potentially leaving the euro zone, it has typically been the smaller members on the periphery – Greece, especially – for which the arguments seem most convincing. But Moody's downgrade suggests that even for EU giants such as France, the common currency and monetary policy may not be working.