Saturday, November 9, 2013

Why Did S&P Downgrade France's Sovereign Debt?

Paul Krugman responds to the S&P downgrade by comparing France's debt with that of the UK which it did not downgrade.  On the surface, France looks similar or better than the UK.  The S&P justified the French downgrade by arguing that France has not generated enough growth enhancing reforms.  This presumes that the S&P knows which kind of structural reforms will generate growth and that it understands France's internal situation better than its government.  Krugman does not believe that economists really know which reforms will indeed produce growth in a specific country.  The S&P can't know what economists cannot agree upon.

Since the S&P can't really know what will produce growth in France, why did the downgrade France's debt?  It turns out that they did not like the way that the government has attempted to reduce its budget deficit by raising taxes on the wealthy.  They prefer cuts in government spending to tax increases.  The S&P may also believe that France is not free market enough for its taste.  They would like France to reduce the size of its government and the welfare state that it supports.  In other words, fiscal responsibility is only a good thing when it used to reduce the welfare state.

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