A few people have asked a pretty good question, albeit in fairly belligerent tones: How can I say that France isn’t doing too badly, when I also say that the euro has been such a problem?

The answer lies in the nature of the euro problem; France is not Spain.

What happened when the euro was created was a flood of capital out of the core, mainly Germany, to the periphery, especially Spain. The counterpart of this move was the emergence of huge current account surpluses in the core, huge deficits in the periphery. The problem now is that correcting these imbalances is very hard given a common currency. Here’s the usual picture — but this time with France added:

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France, which didn’t get a big, unjustified confidence boost from the euro, wasn’t part of this process — it was neither a big lender nor a large borrower. So it doesn’t have the peripheral adjustment problem.

You can also look at inflation:

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The first decade of the euro left Spain very overvalued, Germany very undervalued. France was in between, so there was no big news either way.

To use the jargon, the euro area suffered from very large asymmetric shocks — but France, which roughly tracked the euro average, wasn’t subject to these shocks.

So again, why the downgrade?

In 2011-2012 markets turned on France, for a while. But this was a liquidity issue, not a real concern about solvency, and it went away when the ECB signaled that it was willing to do its job as lender of last resort:

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Oh, and here was the massive action after S&P’s announcement:

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Seven whole basis points!

So I stand by my assessment: S&P wasn’t really assessing French default risk, it was slapping the French on the wrist for not being sufficiently committed to dismantling the welfare state.