What’ll be the impact in the UK, France and beyond?

Politics is a relative game. The good lose out to the best; the mediocre beat the poor. Whether a government is seen as doing a good job depends partly on whether people feel good about their lives and confident in their future, but more on whether they think someone else could do better internally, and whether others are doing better overseas.

As such, the decision of Standard & Poors to downgrade several Eurozone countries, including fellow G7 members France and Italy, and former triple-A rated Austria, will have an effect not just across the Eurozone but in the UK and elsewhere too.

The economy is by far the biggest issue in British politics and in policy terms, the question of which party is most trusted on it can be expected to play a huge part in determining the outcome of the next general election.

That’s why it matters when S&P downgrades France’s debt but not Britain’s it powerfully validates the government’s simple line that the pain is worth it, the policy is on course and that the government knows what it’s doing.

Against which, Labour have two problems. The first, less important one is that the UK was on negative watch during the latter stage of their period in government with comments tantamount to ‘you’ll be downgraded if you’re re-elected and carry on as you are’, which can’t be credibly denied given events in the US and Eurozone.

The second, and more potent problem, is that the public simply don’t buy the ‘cut less, tax less, spend more’ line in the light of the debt crisis on the continent. That leaves Labour with the choice of pushing on regardless in the face of public incredulity and foreign evidence, or U-turning and fighting on Tory ground, which will inevitably upset their natural supporters. Even then, they’d have to convince the public that they could deliver cuts more effectively and fairly than the coalition. For a party bankrolled by public-sector unions, that’s a tough sell.

Having said all this, the government’s success in avoiding the S&P downgrades are not something it can promote too strongly – it’s not wise to rub other governments’ faces in it and no-one’s credit rating can be all that secure, as the Head of the French noted a little while ago.

There are diplomatic consequences though. The chances of Cameron signing up now to some Europact based on what he vetoed before Christmas have to be next to nil. The PR that would result from appearing to tie the UK government to a failed EU project would ensure that his backbenchers (and probably some ministers) wouldn’t stand for it. That alone has consequences for how the Eurozone crisis plays out.

As does the effect on the French. The downgrade, in the face of continuing British and German triple-A ratings, is a humiliation and increases further the prospects of a Hollande presidency and Left gains in the parliamentary elections to follow. Indeed, it would be no surprise were Sarkozy to slip into third place in polls in the next week. He too is in no position to get anything he signs ratified, as his fellow leaders know.

All of which means it’ll be almost impossible to get anything meaningful agreed at an EU level before May – too late for the current Greek deadline – and so implying that structural reform of the Eurozone will have to be divorced from a resolution of the Greek situation, or there’ll be another bailout without reform, or there’ll be an unstructured Greek default. None of which options is likely to appeal to Frau Merkel. Interesting times.

David Herdson