Southern Europe Neglects Freedom and Is Being Downgraded
The decision of “Standard & Poor’s” to downgrade the credit ratings of nine Eurozone countries normally led to a lot of reactions and comments. European leaders hurried to “question” the agency`s rightness and turned the issue into almost political discussion. In all of the statements out there some key words are used: “American agency”, “inappropriate moment”, “unclear criteria”, “incomprehensible”, “illogical”, etc. If the European leaders` position could be summarized in simplified and not so politically correct mode, it would sound like: ”The decision of S&P, those Americans, is incomprehensible and is based on unclear criteria. This decision is not coming accidentally in the most inappropriate moment for Europe.” This reaction couldn`t really surprise us, but the stranger thing is that the “conspiracy” approach towards this decision fits the public sphere and somehow shape the debate successfully.
Outside the political talk however this decision was long awaited and the markets normally didn`t react so dramatically, as the politicians did. Let`s do not forget that this same American agency downgraded the credit rating of the USA for the first time in history half an year ago. In result France had higher rating than the USA these last months, so France was rated as more solvent in long term. How does this cope with the conspiracy theory about the bad American agency which is playing with Europe?
The decision of S&P is entirely understandable and logical. Europe could have swept some key players (such as Papandreou and Berlusconi), but the situation is almost the same – every weekend the Euro is being saved and there are talks being held about the debts of Greece. Moreover, what is really striking is how can we possibly be in a situation called “European debt crisis” and still be surprised that some European countries are losing their “AAA”. You can’t be in a debt crisis and at the same time be some kind of a world solvency model.
The most interesting argument that was heard is that the moment was inappropriate. In fact, the whole idea of downgrading supposes the moment to be inappropriate. The job of the credit agency is not helping countries to finance their spending, but rating how solvent these countries are. When a country copes with problems, the agency should reflect that in its credit rating. Whether it is appropriate or inappropriate for the given country does not matter. It is appropriate for every country to have “AAA” rating and inappropriate to be downgraded. If we are to follow this line, we are fully undermining the job of the credit agencies at once.
In fact, this is what European leaders are trying to do these months. It is enough to recall the idea to “temporary ban country ratings” that we commented not so long ago. In other words, if the supposedly independent credit agency is giving us “good” rating – there should be rating, if we are not satisfied with the “rating” – there shouldn`t be one at all. The other idea, of course, is a “fully independent” European credit agency to be created. The context, in which this proposal is made, assumes that this agency would somehow improve the situation in Europe, that there would be A`s given to everyone and everything would somehow work out. Countries` solvency however is not measured by the A`s given by some credit agency, but instead by the market players` evaluation of the county`s ability to cope with debt – either payments on foreign debt or payments on promised pensions. It is enough to recall that “Lehman Brothers” was also graded with triple A’s till the day they went bankrupt.
A single brief review of some Europe countries is enough to explain the rating story. The rating of all big Southern countries is being lowered – Italy, Spain, France, and Portugal. Greece however managed to keep its rating – still the lowest in the world. All of these countries in the last decade were dependable on public spending to sustain their growth rather than on reforms. Excluding Spain, all of the rest haven`t made any record on increasing the economic freedom during the last 10 years and they are already falling behind Bulgaria. The result of spending and lack of reforms is clear – the credit rating of all is going down, Portugal is joining Greece with its non-investment rating, and now Bulgaria`s rating is comparable with those of Italy.
The last one is actually the big news. Long-term development is often neglected and daily news seems to dominate. During the last ten years Bulgaria was slowly heading towards economic freedom and reforms and steadily climbing the latter to wealth. Italy was doing the opposite – undermining economic freedom, not making reforms and getting relatively poorer. Eurostat`s statistics shows that in 2000 GDP per capita (PPS) in Bulgaria was only 28% of the average in EU-27. Italy was as rich as Germany – making 118% of the average for EU-27 in 2000. Ten years later, in 2010 the situation changed – Bulgaria reaches 44% of EU-27 average and Italy – 101%, so Italy became an average country. You may say that we are still the poorest and they are remaining rich, but the half way between Bulgaria and Italy was passed for just 10 years. Instead of being more than 4 times richer, they are now only 2. The gap is still big, but the two countries are getting closer and our direction is the right one.
