BRUSSELS - Standard and Poor's downgrading of France's rating, and that of eight of its European neighbors, is the latest cold blow for the euro zone. During the "black Friday" announcement, S&P took aim at Austria, which like France lost its triple A rating, as well as Malta, Slovakia and Slovenia which were each downgraded by one notch, while Italy, Spain, Portugal and Cyprus' ratings were each cut by two notches. In addition, 14 of the 17 euro-zone countries were given a negative outlook, meaning that they are are likely to be downgraded within a year.

S&P could have downgraded the whole euro zone as a block. But by choosing to deal with each country separately, it has created a risk of increased political and financial tensions across the entire currency zone.

The market implications are "worse than a downgrade for the entire euro zone, because of the likely political disagreements, debates about the amount of the financial firewall and investor anxiety," says one analyst at the Royal Bank of Scotland (RSB). The S&P's decision, however, was primarily motivated by the "insufficiency" of European leader's response to the crisis in the past few weeks, most notably during the European summit that took place on December 9.

Moritz Krämer, S&P's European director, explained that beyond the weak response, there was also an incomplete evaluation of the causes of the crisis. "The political environment around the euro does not stand up to the challenges of the crisis," he said.

Germans get off easy

But Germany, which escaped even a warning from S&P, is at least as responsible for the euro zone's response to the financial crisis as the other euro countries. In fact, considering Germany's role as a leader in the euro zone, it is probably even more responsible for Europe's response to the crisis than its neighbors. Yet Germany was the only euro-zone country to maintain both a triple A rating and a stable outlook.

For many, both within European institutions and inside Nicolas Sarkozy's entourage, the setback inflicted on euro-zone countries by S&P confirms a continuing lack of understanding regarding the euro zone's work. "Germany is the big winner in this exercise, and will see its negotiation power reinforced," the RBS said. Thierry Breton, the former French minister of the economy, put it bluntly: "Berlin is alone in the cockpit."

The first consequence of the "decoupling" in status of Berlin and Paris, is that France, which already was having trouble convincing Germany to increase its commitment to the euro-zone rescue, will now find itself with even fewer cards in hand. If, as is emerging, the rating of the European Stability Fund is based largely on France and Austria's rating, then the euro zone will be left with only two choices: either Europeans will have to accept a reduction in the Stability Fund's capacity (which is currently around 170 million euros, according to the RBS), or the four euro-zone countries that still have a triple A rating will have to increase their guarantees.

Based on Angela Merkel's comments on Saturday, the later scenario seems unlikely. Yet that firewall is, at the moment, the only barrier against a crisis contagion in Italy, which, according to Moritz Krämer, is going to have to find 130 billion euros between now and April, and 300 billion euros by the end of 2012.

In addition, Berlin will now be able to use its rating to continue to impose a purely "budgetary" response to the crisis on all of its partners. This past weekend, Angela Merkel requested that the budgetary pact that is currently being negotiated be implemented quickly. "It's not about trying to mitigate the crisis everywhere one can, it is about giving solid financial guarantees for the future," she said.

Read the original article in French

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