By: Dr. Mike Campbell

The leaders of France and Germany have called for treaty reforms to ensure that a future Eurozone crisis can be prevented; better late than never. They hope that the revised treaty could be in place by March 2012 which is lightening fast by EU standards. The treaty would be designed to enforce strict governance within the 17 nations sharing the single European currency. Of course, nations were supposed to adhere to the convergence criteria in the first place, but that fell to pieces when the extent of the global financial crisis became clear.

The details of the Franco-German proposal remain sketchy and will be presented to other EU leaders on Friday during an EU summit meeting. Following hard on the heels of concerted action by leading central banks aimed at improving liquidity, the proposal was helping to bolster both the Euro and stock markets, however ratings agency Standard and Poor’s has spoiled the party.

S&P has announced that it is putting almost the entire Eurozone on “credit watch” as a result of the on-going sovereign debt crisis which is raging in Europe. The odds are 50:50 that six AAA rated nations, including Germany and France could see their credit ratings downgraded. Inevitably, such a move may push up borrowing costs in the shape of bond yields on sovereign bond issues – hardly helpful in the circumstances.

S&P’s decision was hardly unexpected since the potential ramifications of the crisis have been debated and rehashed since Greece first got into difficulties. The same rational that S&P used to justify the move could equally be applied to Japan and the USA which have debt burdens which dwarf the Eurozone problem. Whilst the GDP of both Japan and the USA outstrip any EU country, the block, as a whole, boasts the largest GDP on the planet. The timing of the S&P move has been criticised as insensitive in various quarters. The markets and the Euro have all slipped lower on the news. Other ratings agencies have yet to follow suit.