Shoot my neighbour, don't shoot me

Christian Noyer, the governor of the Bank of France was misrepresented in the press yesterday. Several UK newspapers gave the impression that he thought that the UK deserved to lose its triple A rating.

What he actually said was that French economic fundamentals were sufficiently strong to avoid a downgrade. Moreover, if France were downgraded, then a British downgrade should also follow. To support his argument, he pointed out that compared to France the UK has a higher deficit, a roughly comparable debt stock, higher inflation and lower growth.

Mr. Noyer's comments are accurate. UK macroeconomic numbers are slightly worse than those in France. In fact, economies across Europe are performing abysmally. It doesn't much matter whether a country is inside or outside the euro, economic growth is slowing rapidly and a continent-wide recession looks very likely for the first half of next year.

What makes France more vulnerable to a downgrade is not primarily its weak macroeconomic performance. Rather, it is because it belongs to a monetary union that includes several countries that cannot finance their fiscal deficits. To counter this lack of financing, France is moving closer to a fiscal union. The expectation is that France would have to use its own fiscal resources to bail out its neighbours. This will place a massive burden on the already weakened French economy.

In contrast, UK is not encumbered by the financial problems of its weak and feeble neighbours. Notwithstanding the impending European recession, it is better to be outside the euro right now. Unfortunately, there are no orderly exit strategies from the single currency. Once inside the euro, countries are trapped. Any attempt to leave would bring the whole Eurozone system down.

Thus, it seems, that Eurozone was one of those things that countries joined in haste, and now can repent at their leisure.