Wall Street Journal
December 7, 2011
The euro zone is finally being recognized as a single unit—but not in the way it would like.
Standard & Poor's threat to downgrade 15 euro-zone countries is driven by the currency bloc's political paralysis and shared economic fate. But it also reflects Europe's fault lines by treating individual countries differently, with the risk that France emerges with a lower rating than that of Germany. All of this underlines the ultimate need for greater integration and common bond issuance if the euro zone is to survive.
S&P's action came as a surprise both in its scope and timing. Six countries—Germany, the Netherlands, Austria, Finland, Luxembourg and Belgium—face possible one-notch cuts, with nine, including France, facing a possible two-notch downgrade. That distinction threatens to exacerbate market tensions between the haves and have-nots in the euro zone.
In one way, the situation is similar to S&P's U.S. downgrade. This is a direct response to a political failure to address problems. But for U.S. Treasurys, a downgrade to double-A-plus was a non-event, with the impact felt more on risky assets. For Europe, the key will be the treatment of France and Germany. A downgrade for both to double-A-plus would create a level playing field that wouldn't necessarily strain the system. A different outcome for the two euro-zone giants could create further political strains.
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