On Friday 13 January Standard and Poor's downgraded nine euro-area countries. The outlook for fourteen of the seventeen members of the club is negative. Beyond the headline-grabbing downgrade of France, this reassessment is a vote of no-confidence on the decisions taken on 9 December by the European leaders. In the words of the S&P communiqué, "the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems (..and)is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating”.
As developed by my colleagues Nicolas Véron and Guntram Wolff in a recent Bruegel Policy Contribution, the credit rating agencies have not met the expectations placed on them by investors and policymakers and there are good reasons to dispute the accuracy and timeliness of their assessments of sovereign solvency. However S&P’s disappointment with the policy response to the euro crisis cannot be dismissed easily. What is said in the communiqué is largely what independent economists, including from Bruegel, have repeatedly written: that solving the euro crisis requires much more than pushing for a thorough and inflexible enforcement of the existing fiscal rules.
S&P’s mass downgrade is a message to the European policymakers. Rather than to blame once again the rating agencies for their (undisputable) failings or to introduce further consolidation packages they should listen to it and accept that beyond the weaknesses this or that country exhibits it is the policy system as a whole that is weak and in need for repair.
In a new column, I argue that the strategy currently implemented in the euro area is a risky gamble. In a new Policy Contribution, The Euro Crisis and the New Impossible Trinity, I discuss the roots of the euro crisis, explain again why solving it will take more than a mere tightening of the fiscal framework, and discuss alternative options for deeper reform.