Second French Downgrade Gives Germany Upper Hand

Moody's downgrade of France's debt hurts clout at bargaining table.

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.

Confidence Comment

The spread between French and German government 10-year debt is about 72 basis points, down from more than 200 basis points a year ago and 143 basis points when Hollande took office in mid-May.

German Performance

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.

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