France maintains stable outlook, stable politics, prudent macroeconomic policy

In its annual report on France, Moody’s Investors Service says the government’s Aaa ratings and stable outlook reflect the country’s large and diversified economic base, stable political institutions and a prudent macroeconomic policy framework.

“The new president and prime minister want to adapt the French social model to the needs of sustainable economic advancement and global competition,” said Alexander Kockerbeck, a Moody’s Vice President-Senior Credit Officer and author of the report.

“The new leadership is acknowledging that structural reform inertia poses longer-term risks for French fiscal sustainability.”

President Sarkozy’s election campaign stressed his intentions to reinvigorate reforms, including the politically-sensitive issue of deregulation of the labour market, in order to put the economy on a higher growth path. In addition to managing public finances more efficiently, Kockerbeck said that faster growth would be an important ingredient towards securing the government’s ability to meet its social commitments — particularly pensions — with financial credibility.

“Economic growth has been modest for some time, budgetary imbalances have been relatively large and manifestations of both social and political discontent have indicated the desire for change,” said the analyst.

In Moody’s opinion, following through with the proposed reforms is a kind of litmus test of President Sarkozy’s determination to undertake fundamental changes to the ‘contrat social.’

“In this context, the government’s ability to stand up to the unions’ 11-day strike late last year can be seen as an enormous success, which has both increased the credibility of planned reform measures and removed fears of a repetition of a broad social movement against reforms as happened in 1995,” said Kockerbeck.