The Euro Fantasy Darkens: Another AAA Bites The Dust

It didn’t take all that long. In November 2011, Alexander Stubb, then Finnish Minister for European Affairs and Foreign Trade, added his morsels of wisdom to the Eurozone debt crisis that was blooming into splendid fruition.

“It should be the triple-A countries” – at the time Finland, Germany, France, Austria, the Netherlands, and Luxembourg – “that basically, not dictate the rules, but at least have a strong say, because why would we listen to countries that are not taking care of their own public finances?” he told Reuters.

With a PhD in International Relations from the London School of Economics and Political Science, he knew whereof he spoke.

“For me, the euro is a Darwinist system. It is the survival of the fittest. The markets take care of that, and I think that’s the best way we can keep up market pressure.”

Political pressures and the force of the financial markets would elbow these non-triple-A debt-sinners countries – 11 of them at the time – into cutting their deficits and eventually, someday, their debts, as prescribed by treaty, or they’d force them out of the Eurozone.

Europe’s “real core” is made up of those countries that use the euro and are triple-A rated, he said. They have a better economic management reputation than the rest. So, instead of some political core, “it’s a market driven core.” And those countries that couldn’t make it to a triple-A rating, well, the Eurozone might need to be a lot smaller….

In the summer of 2012, Uncle Draghi’s “whatever it takes” washed over these markets.

In June 2014, Stubb became Prime Minister.

And today, Standard & Poor’s cut Finland’s triple-A rating to AA+, same as many other debt sinners in the Eurozone. Only Germany and Luxembourg remain in that triple-A rated core of Europe that Stubb had so wisely described three years ago.

Finland’s economy will likely shrink in 2014 for the third year in a row, dependent as it is on its disappearing mobile phone industry (Nokia) and the paper industry. And now, the Ukrainian fiasco is causing a lot of unhelpful friction with neighbor Russia. Or as S&P put it:

The downgrade reflects our view of the risk that the Finnish economy could experience protracted stagnation because of its aging population and shrinking workforce, weakening external demand, loss of global market share in the key information technology sector, structural retrenchment of the important forestry sector, and relatively rigid labor market.

Maybe the Troika should impose the same “structural reforms” on Finland that have helped Greece so much?

But Stubb doesn’t need to worry that this vicious downgrade would raise Finland’s cost of borrowing. Just look at Japan. It is in the worst fiscal situation of any still functional country, with the worst deficit (for years, the government has borrowed around 50% of every dime it spends) and the biggest mountain of debt of any country out there, and much, much worse than the worst in the Eurozone, which is Greece.

S&P reaffirmed Japan’s AA- rating – three steps down from AAA – in February 2013 shortly after Abenomics became the economic religion that everyone in the media instantly believed in, though the Japanese, who are a bit cynical about their politicians, were less convinced. S&P too believed in Abenomics: “We believe the measures adopted by the new Shinzo Abe administration at the beginning of its term will be critical if it is to arrest what we see as a prolonged decline in Japan’s sovereign credit standing.”

In October 2013, S&P re-reaffirmed, pointing at Japan’s strong external position, rich and diversified economy, improved political stability, and a financial system that hasn’t collapsed yet, weighed against the treacherous fiscal position, aging and declining population, and of course, the bogeyman of over-indebted societies, deflation. AA-? I mean, come on. Have the folks at Standard & Poor’s already been replaced by bots?

But look how much Japan’s government pays to borrow – from the Bank of Japan, these days – for 10 years: 0.50% … the lowest in the world! That’s the state of the credit markets today.

So Finland’s newish Prime Minister doesn’t need to worry. His dream that credit markets would force countries to do the right thing and cut their deficits and get their house in order was a pipe dream.

His dream that the “market driven core,” the Eurozone’s “real core” consisting only of triple-A countries – Germany and Luxembourg – could “basically, not dictate the rules, but at least have a strong say” and elbow all others into line, or out of the Eurozone… this dream of his that the euro is “a Darwinist system” where “the survival of the fittest” reigns… all these noble concepts from three years ago when everyone was hammering on Greece, well, they were elegantly wiped off the face of the Eurozone with Uncle Draghi’s promise to do “whatever it takes” to force down yields to near zero even for the worst debt sinners. That promise was his effort to keep the Eurozone duct-taped together. A promise that the credit market has no apparent interest in testing – in part because that credit market, thanks to that very promise, is no longer a market.

Stubb, however, couldn’t respond in any official manner to this downgrade debacle; he was busy eating his words.

In Germany, economic comparisons to the terrible year of 2009 are suddenly cropping up with unnerving regularity. And stocks have already rolled over. Read…. “There’s no Reason to Panic” about German Miracle Economy