We've asked Johan Van Overtveldt, author of The End of the Euro, to check in again about the ongoing euro crisis afflicting Europe. Here's his latest commentary:

Rating agency Standard & Poor’s recently downgraded Italy to a status just above junk. This is a significant move. Italy is the third most important economy of the euro area after Germany and France. Until now the eurocrisis was focused mostly on smaller countries like Greece, Portugal, and Ireland. These three countries together make up only 6 percent of the entire euro area GDP; Italy represents 17 percent.

This downgrade of Italy is easy to explain. Since the start of the financial crisis, the country has been in a quasi-permanent state of recession. Since 2008, the cumulative contraction of Italy’s GDP amounts to 10 percent. Worse is yet to come, a message stressed not only by S & P’s but also by the International Monetary Find in its recent forecast update. A significant loss of international competitiveness, combined with far-reaching over- and mis-regulation of the labor and other markets, all contribute to Italy’s dismal growth prospects. A gross outstanding debt equal to 140 percent of GDP also makes the bond markets nervous. After the US and Japan, the third most important country worldwide in terms of outstanding government bonds is Italy.   

But if it’s the right thing to downgrade Italy, the question immediately arises as to why France is still rated so much higher. The French economy is not much better than Italy’s. So if Italy’s rating is more or less correct at BBB+, France’s rating at AA+, five notches higher, is outright ridiculous. Until now the French economy has done better in terms of growth, since its GDP is now more or less back to its 2007 level. But France’s international competitiveness is close to Italy’s (+/- 25 percent worse now than Germany’s position). France also has a substantial trade deficit, while Italy has a surplus. France saw its share of worldwide exports decline from 5 percent in 2003 to 3 percent now, while Italy’s declined from 4 to 2.8 percent. Unemployment is comparable in both countries. 

Budget deficits are systematically larger in France than in Italy, and the gross debt level now stands at 110 percent. All studies of the long-term sustainability of public finances conclude that Italy is in much better shape than France. One can only wonder if and when rating agencies and bond markets will start to realize that if one is rightly worried about Italy, one should also be worried about France.