FRANKFURT (Standard & Poor’s) –The recovering economies of Germany and France are supporting improvements in the sovereigns’ credit quality, but challenges remain, says a report published today by Standard & Poor’s Ratings Services “Germany And France: Turning The Corner?”
Growth is recovering by an expected 2.5% per year in the Federal Republic of Germany (AAA/Stable/A-1+) and 2.2% in the Republic of France (AAA/Stable/A-1+) over 2006-2009. Unemployment is dropping quickly in Germany, while improving more gradually in France. “Government debt levels are now on a clear downward trend, while pension reforms and lowered structural deficits have also improved the long-term sustainability of public finances,” said Standard & Poor’s credit analyst Kai Stukenbrock.
The turnaround has been more dramatic in the case of Germany, partly as the initial cyclical downswing had been more pronounced, but also due to considerable structural progress, the report says. In France, the recovery has been more gradual.
“Further improvements in fiscal indicators in France will depend in large part on how the incoming administration chooses to sequence reforms,” said Standard & Poor’s credit analyst Remy Salters.
While the economic outlook for both major continental economies is relatively positive, the two diverge significantly both in terms of political cycles and underlying growth dynamics, the report continues. With presidential and general elections in France taking place only this year, the possibility of fresh impulses to economic and fiscal policy is coming through 18 months later than in Germany, where the government formed in 2005 focused in particular on measures to quickly restore public finances. At the same time, Germany is still at the beginning of the business cycle initiated by export growth, while France’s cycle is more mature and remains driven primarily by private consumption.
Longer-term challenges remain, however, despite the improved outlook. Aging societies require both Germany and France to undertake additional efforts to maintain economic growth and sustain public finances. Despite recent reform efforts, further liberalization of their rigid labor markets and further reforms to systems of social security will be required to achieve this.
“The developments, particularly in public finances, present an improvement in both sovereigns’ creditworthiness,” said Mr. Stukenbrock. “While Germany and France will retain their position as the ‘AAA’ rated sovereigns with the highest debt levels, they are expected to continue moving away from their record debt levels of 2005.”
