|Sarkozy versus Cameron: economic statistics show it's too close to call.|
Photograph: John Schults / Reuters/REUTERS
The entente is no longer so cordiale. As the big credit rating firms assess whether to strip France of its prized AAA status, Bank of France chief Christian Noyer this week produced a long list of reasons why he believes the agencies should turn their fire on Britain before his own country.
France's finance minister François Baroin put things even more bluntly: "We'd rather be French than British in economic terms."
But is the outlook across the Channel really better than in Britain? Taking Noyer's reasons to downgrade Britain – it "has more deficits, as much debt, more inflation, less growth than us" – he is certainly right on some counts.
Britain's deficit will stand at 7% of GDP next year, while France's will be 4.6%, according to International Monetary Fund forecasts. But Britain's net debt is put at 76.9% of GDP in 2012 and France's at 83.5%. UK inflation has been way above the government-set target of 2% this year and the IMF forecasts it will be 2.4% in 2012. In France the rate is expected to be 1.4%.
On growth, neither country can claim a stellar performance. France's economy grew 0.4% in the third quarter and Britain's 0.5%. Nor has either a particularly rosy outlook. In Britain the economy is expected to grow by 1.6% in 2012. But in the near term there is a 1-in-3 chance of a recession, according to the independent Office for Budget Responsibility. In France, the IMF predicts slightly slower 2012 growth of 1.4%. But in the near term France's national statistics office predicts a technical, albeit short, recession.
What Noyer and Baroin fail to mention, say economists, are the other key factors the credit ratings agencies take into account. What the agencies are charged with assessing is how likely a country is to be able to repay its debts. In making that call, whether a country is in the euro or not plays a big role, said Victoria Cadman, economist at Investec.
"If a country is in the euro it is seen as having more risks to its balance sheet," she says, noting France is a particularly big contributor to the eurozone bailout fund, the European financial stability facility. "Monetary autonomy is important as well. Britain can keep the printing presses going. France doesn't have that luxury," added Cadman.
The fact the Bank of England has embarked on quantitative easing (QE) is a reflection of a weak economic outlook. But it is already helping the UK's repayment prospects, because it involved the central bank buying government bonds, argued Alan Clarke, eurozone economist at Scotia Capital. The European Central Bank has shown no such willingness towards QE.
"The UK central bank is buying so many gilts and will probably announce more purchases in the new year. There is hardly enough debt to go around, so the risk of a default is low," says Clarke.
Ratings agencies will also be looking at repayment of maturing bonds and interest. France has to come up with £100bn next year, but the UK has to find only half that, £53bn.
There is also the question of how committed a government is to deficit reduction. In the UK the coalition has vowed not to stray from its austerity drive, and in France, there are elections next year, but still the government has remained committed to cuts. "Sarkozy has done two pre-election fiscal tightening measures, which is quite brave in the run-up to an election," says Clarke.
On the deficit, like so many other factors, the agencies are looking well beyond where things stand now. Longer-term France and the UK are level-pegging in deficit terms. The IMF puts the shortfall at 2.3% of GDP for both countries in 2015.
So where should that leave their ratings?
Investec's Cadman says she has sympathy with the ratings agencies' current stance: "They have got to take into account the credibility of deficit reduction programmes, whether a country is in the eurozone, whether it has monetary autonomy and on balance the fact they are looking at France is sensible. But that doesn't mean to say they won't have another look at the UK."