Just as Europe’s major economies, led by Germany, have exited the recession with modest growth, France, the second largest nation in the region based on GDP was downgraded by Moody’s. The reason was extremely low growth.

Moody’s Investors Service has today downgraded France’s government bond ratings by one notch to Aa2 from Aa1. The outlook on the ratings is stable.

The downgrade of France shows the extent to which the improving economy of Europe is really two recoveries. One is Germany’s which looks like the recovery in America. Germany’s unemployment rate of 4.7% is better than that of the U.S.  Germany’s GDP growth in the second quarter was .4%. On the other hand, France’s GDP growth was zero, which means it hovers on the brink of recession.

The credit rating agency’s researchers wrote:

The current economic recovery in France has already proven to be significantly slower — and Moody’s believes that it will remain so — compared with the recoveries observed over the past few decades. In part, this is due to the erosion of competitiveness and loss of growth potential following the global financial crisis. It is becoming increasingly clear, in the rating agency’s view, that these problems will continue to constrain growth long after the cyclical recovery from the crisis is completed. In Moody’s opinion, France’s potential annual growth rate is at most 1.5% over the medium term. France faces material economic challenges, such as a high rate of structural unemployment, relatively weak corporate profit margins, and a loss of global export market share that have their roots in long-standing rigidities in its labour and product markets.

And, the downgrade could become worse:

As reflected by the stable rating outlook, Moody’s does not anticipate any movement in the rating over the next 12-18 months. However, downward pressure on the rating could arise if progress on structural macroeconomic reform were to fail to materialise as we expect. Moody’s could also downgrade France’s government debt rating further in the event of a reduced political commitment to fiscal consolidation or should we conclude that a material increase in debt was likely for any other reason.

France’s failure to recover is a warning to other national economies in Europe. Show growth prospects in the near term, or face downgrades which are likely to make the cost of borrowing higher.

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