Merkel vows quicker reforms in light of EU credit downgrade
The S&P downgrade of 9 EU countries may have been expected, but the warning from the US company about the future is not.
In a conference call with reporters and analysts after downgrading nine of the euro zone's 17 countries, Standard & Poor's said it saw continued risks from the debt crisis that has overshadowed Europe for the past two years and said the single currency area was heading towards recession.
It also warned that France, which suffered a downgrade to AA+ from the top-notch AAA, was at risk of further cuts if a recession further inflates its debt and budget deficit.
"The policy response at the European level has in our view not kept up with the rising challenges in the euro zone," S&P credit analyst Moritz Kraemer said on the call, forecasting a 40 percent chance of euro zone gross domestic product contracting by up to 1.5 percent in 2012.
S&P is souring on the fiscal reform pact that Angela Merkel and Nicholas Sarkozy pushed through at a meeting of EU leaders in December. The latest draft of that proposal - which would give the EU government the right to veto national budgets and tax policy -has already been watered down:
In Germany - whose top AAA rating survived unscathed - Chancellor Angela Merkel said the downgrades underlined why a so-called 'fiscal compact' must be signed by member states quickly, and the next bailout mechanism, known as the ESM, should be funded soon.
"We are now challenged to implement the fiscal compact even quicker ... and to do it resolutely, not to try to soften it," she said at a meeting of her conservative Christian Democrats (CDU) in the northern city of Kiel.
"We will also work particularly to implement the permanent stability mechanism, the ESM, so soon as possible -- this is important regarding investor trust," she added.
European Central Bank policymaker Joerg Asmussen warned that Europe's drive to tighten fiscal rules was being softened, considering the latest draft of the agreement a "substantial watering down" of budgetary discipline because it would allow extra spending in extraordinary circumstances, the Financial Times Deutschland reported.
Leaders including Merkel have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments.
S&P said it was not working on the assumption of a euro zone break up, although it blamed its leaders for focusing too much on cutting debts and not sufficiently on competititveness.
The EU bailout mechanism - the ESM - is being hampered by a lack of funding and the belief that it won't be big enough if Italy and or Spain goes under. Coupled with the lack of confidence in Merkozy's fiscal union plan, it appears that by mid-spring, the EU will be back in full crisis mode, standing on the edge of the precipace once again.