French downgrade tempers mood

After yesterday’s 2.4% increase in the FTSE 100 and 2% rise in the S&P 500 on hopes that a solution to the U.S. fiscal cliff might be found between President Obama and lawmakers on Capitol Hill, the markets have been knocked down a little by a French sovereign debt downgrade.

Moody’s has stripped France of its coveted triple A sovereign debt rating and moved it to Aa1 with a negative outlook.

Moody’s cites underlying structural issues with the French economy as well as exposure to the eurozone debt crisis. The country has been blighted by “big government” for decades with government spending now accounting for around 55% of GDP. Inflexible labour laws, high social and personal taxation and a seemingly anti-business bias have all made France lose ground against Germany in terms of competitiveness, particularly in export markets.

Socialist President Hollande, elected on the promise of tax cuts and a reversal in employment legislation introduced by his predecessor Nicolas Sarkozy, has been forced into a series of embarrassing u-turns as the state of the French government finances has come into focus. Certainly there is no quick and easy fix for the French economy without a radical rethink on economic and taxation strategy and it is unlikely that Hollande will be the man to deliver that.

Contrarian Investor UK