French downgrade widens gulf with Germany as talks loom

France's loss of the top credit rating at Moody's Investors Service may weaken President Francois Hollande's leverage in European budget talks and deepen concern in Germany over its neighbor's lagging competitiveness.

The downgrade late yesterday of Europe's second-biggest economy underscores the concern expressed by allies of German Chancellor Angela Merkel that the Socialist Hollande's failure to recognize the urgency of France's woes risks a deepening of Europe's slump.

"This downgrade will certainly increase pressure on France big-time," Jan Techau, director of the Carnegie Endowment for International Peace office in Brussels, said today in a phone interview. "It gives Germany more of an edge over France."

With French bonds rallying since Standard & Poor's stripped the country of its AAA credit rating in January, the impact of the Moody's downgrade may be more political than financial. Just last week, German Finance Minister Wolfgang Schaeuble spoke out against his countrymen calling France the 뱒ick man?of Europe. The day before, France's Liberation newspaper ran a front-page article highlighting German anxiety about Hollande's policies.

French debt fell today, with 10-year yields rising 4 basis points to 2.12 percent, though that's still close to the record low of 2.002 percent reached Aug. 3, showing investors do not share German concerns.

The spread between French and German government 10-year debt is about 73 basis points, down from more than 200 basis points a year ago and 143 basis points when Hollande took office in mid-May.

"I don't want to downplay this decision, but France remains one of the top-rated countries," French Finance Minister Pierre Moscovici said at a press conference today in Paris. "There will not be a loss of confidence between France and Germany."

Heading into a summit beginning Nov. 22 in Brussels to deliver the next seven-year European Union budget, France has opposed proposals to cut farm spending as unacceptable, while Germany is seeking to contain EU expenditures.

France is Germany's closest partner in Europe and it "could be good if the Socialists there would courageously initiate real structural reforms now," said Volker Kauder, head of the parliamentary group of Merkel's Christian Union bloc, according to a Spiegel magazine report this month. Germany would like Hollande to "move a little more" toward Merkel, Kauder was quoted as saying.

Hollande has mainly moved in the opposite direction. He lowered the retirement age for some workers, imposed a tax of 75 percent on earnings over 1 million euros ($1.27 million) and lifted the minimum wage. He has also consistently pressed Merkel to ease her push for austerity to fight Europe's three-year-old debt crisis.

France is on track to roughly match last year's record trade deficit, according to the Finance Ministry, and unemployment has jumped to a 13-year high as companies such as PSA Peugeot Citroen SA and Alcatel-Lucent slash thousands of jobs.

France's benchmark unemployment rate rose to a 13-year high of 10.2 percent in the second quarter as the economy suffered its first contraction since 2009 before rebounding in the following three months.

By contrast, Germany has sustained economic growth all year so far and the Federal Labor Agency's key unemployment rate was at a two-decade low in August before it rose by 0.1 percentage point to 6.9 percent the next month.

"The relationship between France and Germany on economic terms is like a shotgun marriage," Fredrik Erixon, head of the European Center for International Political Economy in Brussels, said in a phone interview today. "Germany is helplessly watching the deterioration of the French economy, knowing that it will have an impact on Germany and the euro area -- but without Berlin being able to do much about it."

Elsewhere today, Chinese foreign direct investment fell for a fifth month in October. The Reserve Bank of Australia said more interest-rate reductions may be appropriate to spur growth as the nation's mining boom wanes, according to minutes of the Nov. 6 policy meeting at which it held its key rate.

In the U.S., a Commerce Department report may show that housing starts fell in October after reaching a four-year high the previous month. Builders broke ground on 840,000 houses at an annual rate last month, down from 872,000 in September, according to the median forecast of economists in Bloomberg News survey. (Bloomberg)