Recently, Standard & Poor downgraded Netherlands' sovereign debt from a coveted AAA rating to a AA+ rating. The downgrade came as S&P sees a weak growth outlook, even though the Netherlands is seen as part of Europe’s healthy economic core. Also, S&P raised its outlook on Spain from negative to stable, showing that some of the struggling southern European countries may be recovering. As many southern countries continue to improve economically, some of the northern countries are suffering from poor growth prospects.
Currently, the only countries within the 17-strong European area that have a top rating from the three main agencies include Germany, Finland, and Luxembourg. Netherlands was a crucial ally of Germany while formulating a plan for economic recovery in Europe. For example, in September 2012, the Dutch finance minister met with Germany and Finland in order to discuss how to help the periphery. Netherlands is not the only northern country suffering from poor growth. France, the EU’s second largest economic contributor by gross domestic product (GDP), has also seen slowing growth due to a drop in investment and sluggish exports.
What does this mean for the European Union? It could put more pressure on Germany to support the struggling union. Regardless, the German economy has also seen slowdown in economic activity. In the third quarter, German GDP expanded by only 0.3%, compared to 0.7% in the previous quarter. As growth in the northern, and large, countries begins to slow we could see economic slowdowns for the EU as a whole. Many of the southern EU countries that have struggled in the past have seen recent improvements in their credit ratings. In the past week Cyprus received a rating upgrade and Spain received a stable credit rating outlook.
Downgrades and slowing growth in northern European countries are clear signs that the EU still has many struggles ahead of it. These are countries that make up a majority of the EU’s GDP and are large exporters. Could recent improvements in the periphery countries help improve economic conditions in Europe?