Issue of the week: Europe gets downgraded

Standard & Poor's lowered the credit rating for nine European nations, indicating that Europe has not yet convincingly dealt with the debt crisis.

“Just because you see a punch coming doesn’t mean it won’t hurt when it lands,” said Michael Schuman in It had been rumored for weeks that credit downgrades were in the offing for Europe, but Standard & Poor’s decision last week to lower ratings for nine nations, including Italy and Spain, still “gave the euro zone a fat lip.” France and Austria lost their coveted AAA ratings, and debt issued by Portugal and Cyprus was lowered to junk status. So far, the market’s reaction has been muted. But in calling out European leaders for their misguided and tepid response to the debt crisis, Standard & Poor’s shattered any illusion that the euro zone’s finances were finally on the mend.

These downgrades are a “psychological jolt,” said the Financial Times in an editorial, but they’re hardly the end of the world. As the U.S. can attest, downgrades don’t necessarily trigger higher borrowing costs, and even the European bailout fund’s loss this week of its AAA status is “no bad thing.” But that doesn’t mean European leaders can go about business as usual. It’s past time they “stop squabbling” and fast-track reforms to prevent any more fallout.

Don’t count on that happening soon, said the London Guardian. This downgrade drove a political wedge into the heart of the euro zone. With Paris deemed less creditworthy than Berlin, the joint French-German leadership that has been spearheading the response to the crisis will “go out the window.” That could prove particularly ruinous for Greece, said The New York Times. That country is once again on the brink of default, and the EU, led by Germany, has insisted that Greece won’t get more help unless it proceeds with draconian budget cuts that are “rending Greek society.” Germany needs to realize that “its single-minded obsession with austerity will only deepen the crisis” by driving Greece into a disorderly default and out of the common currency.

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It’s hard not to see last week’s “tragic-ridiculous shipwreck of a cruise liner” off Italy as an apt metaphor for the Continent’s problems, said Bret Stephens in The Wall Street Journal. Every day, we hear European leaders insist that Greece will never default on its debts and that there is no cause for alarm. But as the Costa Concordia made clear, “when the hors d’oeuvres are listing hard to starboard and the waiters tell you nothing’s wrong, something’s terribly wrong.”

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