Angela Merkel says 'long road' ahead for Europe - Canada.com

PARIS - Europe faces a long road ahead to restore investor confidence, German Chancellor Angela Merkel said Saturday, after a stinging series of S&P ratings downgrades sparked a determined response.

On Friday, Standard and Poor's spared Germany's top AAA rating, citing its strong economy and finances but in what was taken as a hurtful dressing down, cut France by one notch to AA+.

S&P also downgraded Italy and Spain, the two countries seen next most at risk in the eurozone debt crisis, by two notches as it affirmed seven and downgraded nine eurozone states in all.

The action was merited because "the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," it said.

In other words, Europe cannot be trusted to put is house in order.

"The (S&P) decision confirms my conviction that we in Europe still have a long road ahead of us until investor confidence is again restored," Merkel said while defending measures taken to stabilize the eurozone economy and strained public finances.

The chancellor said the S&P downgrades meant that a fiscal pact agreed at a December EU summit to tighten economic integration must be implemented quickly.

"We are now called upon to implement quickly the fiscal pact, to implement it with determination... and not try again to soften it," she said, adding that Europe's new permanent bailout fund must be effective as soon as possible.

EU leaders meet on January 30 in Brussels to discuss the plan again, aiming to convince the markets they can solve a crisis that has forced Greece, Ireland and Portugal to seek bailouts and is driving Italy and Spain to the edge.

At a conference call Saturday, S&P noted that the December EU summit "did not lead to any breakthrough," highlighted what it saw as policy makers failing to get to grips with the true extent of their problems.

Merkel tried to soften the blow Saturday by noting that S&P was just one of three ratings agencies, with Fitch earlier in the week saying it saw no French downgrade in 2012 unless the country suffered significant economic shocks.

Austria, who suffered like France with a one-notch cut to AA+, said the S&P move was "incomprehensible" but recognized at the same time that some of the criticism might be justified, in which case the proper response was action.

"The downgrade is bad news but it should wake people up," Austrian Finance Minister Maria Fekter said Saturday.

New Spanish Prime Minister Mariano Rajoy was equally determined.

"The government I lead knows perfectly well what must be done to improve Spain's reputation and to create growth and jobs and we are going to do it.

"We also know what must be done in Europe for this is not only our problem," he said.

EU market commissioner Michel Barnier said Saturday he was "surprised" by the timing of the downgrades, "and fundamentally of its evaluation which does not take into account recent progress."

"In every country, unprecedented efforts are taking place to control public spending," he said, adding that new rules are being introduced to deepen economic integration.

The S&P action pushed the euro to a 16-month low against the dollar on what was a grim Friday the 13th for EU policymakers, and in particular for France's President Nicolas Sarkozy.

The right-wing leader is facing re-election in three months and his main rival in the presidential race was quick to point out that Sarkozy had staked his reputation on keeping the prized rating - and had failed to do so.

"It is (his) politics that have been downgraded, not France," said Francois Hollande, the Socialist candidate who opinion polls say will win the vote to be held in April and May.

French Prime Minister Francois Fillon said the downgrade had been expected and should neither be "dramatized" nor "minimized," and that budgetary "adjustments" would be made if necessary.

The first test for France's credit worthiness will come on Thursday when it will try to raise between 7.5 and 9.5 billion euros in longer term bonds after Italy and Spain managed to get fresh funding this week at much lower rates.

The eurozone suffered another blow Friday with news that talks between Greece and its private bank creditors on a key debt writedown had stalled, putting in doubt a second bailout agreed in October after a first May 2010 rescue proved inadequate.