French Take Aim at Britain as Credit-Downgrade Worry Mounts

French Finance Minister Francois Baroin
French Finance Minister Francois Baroin said in an interview today on Europe 1 radio, “It’s better to be French than British, economically speaking.” Photographer: Fabrice Dimier/Bloomberg

French officials deflected concern about a looming cut in the country’s AAA credit rating by lashing out at Britain.

“It’s better to be French than British, economically speaking,” French Finance Minister Francois Baroin said in an interview yesterday on Europe 1 radio, following verbal jabs against the U.K. by Prime Minister Francois Fillon and Christian Noyer, the governor of the Bank of France. British Deputy Prime Minister Nick Clegg called the remarks “unacceptable” and asked for steps “to calm the rhetoric.”

With the French economy sinking into recession amid the euro-area credit crunch, the officials’ comments serve two purposes, according to Paul Vallet, a professor of international relations at Paris’ Sciences-Po university: prepare public opinion for a possible rating cut and convince voters in an election year that President Nicolas Sarkozy is an effective crisis manager.

“There’s a lot of political posturing going on with the elections,” said Vallet. “They have to convince public opinion they are responding to the crisis and that it’s much worse elsewhere.”

Sarkozy trails his Socialist Party challenger Francois Hollande by six points before May’s presidential election, according to a Harris Interactive poll published Dec. 15.

“There is a search for scapegoats across Europe,” said Vallet. “In the U.K. they are shifting blame to the Germans, and the Germans are blaming everyone.”

Summit Rebuff

The French criticism followed a Dec. 9 European Union summit. Britain was alone among the bloc’s 27 nations to reject a treaty on tightening fiscal cooperation after Prime Minister David Cameron’s bid to shield London-based financial institutions from future EU bank regulations was rebuffed. Sarkozy called Britain’s demands “unacceptable.”

The British haven’t been shy with opinions on their neighbor across the channel. On Nov. 14, British Chancellor of the Exchequer George Osborne told the Evening Standard that the “markets are now even asking questions about France” and said it had been much slower than Britain to address its budget deficit. Just four days earlier, former U.K. Prime Minister Gordon Brown said “France is in danger of being picked off by the markets in the coming weeks and months.”

Franco-British Spats

The Franco-British spat at the EU is far from the first for the countries that have had a prickly relationship for hundreds of years. France twice vetoed Britain’s application to join what was then the Common Market before relenting in 1973.

Margaret Thatcher and Francois Mitterrand clashed throughout the 1980s about the EU’s budget. The bloc’s nascent attempts to create a common foreign policy were shredded by Tony Blair’s and Jacques Chirac’s opposing views on the Iraq War.

The two countries are now pitted against each other on the question of cutting the cost of the EU’s Common Agricultural Policy, while Britain opposes French and German plans to create a European financial-transaction tax.

Britain points to the bond markets as an endorsement of austerity policies that have stifled growth while isolating the U.K. from the concerns weighing on the euro area.

“We have a credible plan” to cut our debt, Vickie Sheriff, a spokeswoman for Cameron said in London. “That is reflected in the bond yield. A lot of people are commenting on the euro-zone crisis and the issues around it.”

‘Credible Plan’

French 10-year bonds yield about 3 percent, the highest of the six top-rated euro-area countries. The U.K. borrows for 10 years at about 2 percent, a rate that’s kept down by a Bank of England bond-buying program that’s potentially equal to a quarter of Britain’s outstanding government debt. The European Central Bank has balked at broadening its bond-buying program.

France’s deficit will be 5.8 percent of economic output in 2011 compared with Britain’s 9.4 percent. Its government debt is 85.4 percent of economic output in France, the most of any top-rated euro nation, compared with 84 percent across the Channel.

“We are all in the same boat,” said Philippe D’Arvisenet, chief global economist at BNP Paribas SA in Paris.

In the third quarter, the British economy grew 0.5 percent and the French economy 0.4 percent, according to Eurostat. France’s Insee statistical institute says France is entering a recession that will last until early next year, with output shrinking 0.2 percent in the fourth quarter of this year and another 0.1 percent in the first quarter of 2012.

Slowing Growth

Britain faces a 0.5 percent contraction in the fourth quarter and 0.4 percent growth in the first quarter, according to the Office for Budget Responsibility. The National Institute for Economic and Social Research said Nov. 3 there’s a 50 percent chance that Britain slips back into recession.

The unemployment rate for 2011 will be 9.8 percent in France and 7.9 percent in Britain, Eurostat said in November. France’s inflation rate was 2.7 percent in November, compared with 4.8 percent in Britain.

Moody’s Investors Service said on Dec. 12 it will review the ratings of all euro countries after the summit failed to produce “decisive policy measures” to end the debt turmoil. Standard & Poor’s placed the ratings of 15 euro nations, including France and Germany, on review for possible downgrade on Dec. 5. Neither company has announced any actions on the U.K.’s top rating.

Fitch Ratings last night reaffirmed its triple-A rating on France while changing the outlook to “negative.”

Not Justified

Noyer, the Bank of France governor, said a downgrade of France “doesn’t strike me as justified based on economic fundamentals.” He told Le Telegramme, a newspaper based in Brittany, “they should start by downgrading the U.K., which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing.”

During a visit to Brazil this week, French PM Fillon said, “our British friends have a deficit and debt that are higher, which I don’t think the rating agencies have recognized.”

Fillon called Clegg yesterday from Rio de Janeiro to tell him credit-rating companies were his intended target, according to a statement from the British deputy PM.

In an interview this week with the newspaper Le Monde, Sarkozy said “there are now clearly two Europes, one that pushes for greater solidarity between its members and for regulation, and one that’s attached solely to the logic of a single market.”

Still, the EU needs Britain, he said, and “would be greatly impoverished by its departure, which happily for the moment is not in the cards.”

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