World Economy

S&P Downgrades EU Outlook to Negative

S&P Downgrades EU Outlook to NegativeS&P Downgrades EU Outlook to Negative

Analysts at ratings agency Standard & Poor’s have lowered their economic forecast for the EU from “stable” to “negative”, over fears of a Greek default and a possible UK exit from the union.

Crisis in Greece—which is currently negotiating a third bailout by its creditors—is at the root of the downgrade by S&P, raising fears that the EU credit rating could be cut from AA+, which would affect the price of borrowing funds on international markets, Sputnik reported.

The agency said the negative outlook was particularly justified by the repeated commitments by the EU to support Greece, which is threatened with bankruptcy.

“EU’s repeated use of its balance sheet to provide higher-risk financing to EU member states (most recently including Greece), without the member states’ paying in capital,” was mentioned as a factor in a press release.

“Negative outlook on the EU also reflects its lack of any paid-in capital, a key difference compared with other multilateral institutions. The EU continues to run a very large negative net asset position, largely reflecting its considerable pension obligations.”

S&P cited worries over the Juncker Plan—named after Jean-Claude Juncker, the current President of the European Commission—which aims to mobilize investments of at least $346 billion in three years.

 Brexit Fears

It expresses concern about the possibility that Britain could leave as one of the largest EU contributors. British Prime Minister David Cameron has promised an in/out referendum of Britain’s membership of the EU, which could take place as early as next year.

When S&P last reviewed the EU’s rating, they revised their outlook for Britain to negative, reflecting concerns about a referendum to exit the EU.

The agency had already reduced France to negative and said: “Together, France and Britain make up 31% of EU GDP and an estimated 39% of net EU budgetary contributions.

“An upgrade of The Netherlands, for instance, would not neutralize the effect of lower ratings on either Britain or France, given that The Netherlands accounts for only 6% of total net contributions to the budget.”

Britain, Germany and France together are the largest contributors to the EU budget—about 70% between them. In spite of the negative outlook, the EU retains its AA+ rating, which means that it has a high grade in terms of sovereign credit rating.

 Most Fraught Period

The EU is experiencing perhaps its most fraught period since being created in 1957. The crises seem to be never-ending and there is growing popular discontent.

The difficulty lies not so much in the scale of any one of the current crises, but in the fact they have arrived on EU leaders’ plates simultaneously.

Taken individually, the issues of possible Greek exit from the eurozone, conflict with Russia in Ukraine, and uncontrolled migration from Africa and the Middle East would be formidable but manageable.

Today, leaders are having to deal with the EU’s crises all at the same time, while being aware that none of these issues is likely to be resolved any time soon.