Scottish Economy Watch

Put up or .....

I see that in a letter to the FT on 24 January, Professors Andrew Hughes Hallet and Drew Scott are asserting that on fiscal and monetary policy in an independent Scotland

"Scotland has .. thought the options through and counted their cost."

The letter makes some sensible points about the likelihood of co-operation between the remaining UK (rUK) and Scottish fiscal and monetary authorities post independence. This is a useful antidote to the scaremongering that comes from some union supporters. But their self-appointed claim to speak for Scotland needs to be supported by evidence.

The First Minister's recent pronouncements on monetary and exchange rate policy post independence give the impression of being made up on the hoof. If the Scottish Government or the Scottish Council of Economic Advisers have undertaken a detailed analysis of the options and cost then I would request publication. If not, then I would urge them to document and publish their thinking.

Scottish independence: currency Q & A

Q. I see the previous UK Chancellor of the Exchequer Alastair Darling, the well known economist Professor Patrick Minford and others, have argued that the Bank of England would not act as a "lender of last resort" to Scotland if Scotland became independent and retained sterling. Are they correct?

A. It is correct to say that the UK authorities would have to agree to this. However, if it is agreed between Scotland and rUK that an independent Scotland remained within the sterling monetary union then the Bank of England (BOE) could become the Bank of Sterling (BOS). The situation would then be formally similar to the position of the ECB to Eurozone member countries. Under current rules the ECB can act as lender of last resort to member country banks but not directly to member states.

Q. Is it likely that the BOE would become a BOS equivalent to the ECB?

A. No, I don't think so. The rUK government would not want the rUK to have the current status of France to the ECB. Because this means that rUK would effectively be borrowing in a "foreign" currency while the BOS, not the rUK, would be issuing the currency. In such circumstances the risk of default on borrowing is perceived by the financial markets to be greater and so the yield paid on rUK Treasuries would be higher than present UK Treasuries, other things equal. This is not going to happen.

Q. So, what does this mean for Scotland if it is in the sterling union?

A. It means that Scotland would not be equal to rUK. The BOE would be the rUK's central bank performing some necessary financial and monetary stability functions for the sterling union. There would be no Scottish central bank. There would be a common nominal interest rate across the sterling union. The BOE would act as "lender of last resort" to all banks in the monetary union, including Scottish banks, but would do so at 'penal' or above market rates. It would also require Scottish banks to satisfy UK financial stability rules, implementing the proposals of the Vickers' Commission and so on. The BOE would need to do this as part of its objective of ensuring financial stability in both rUK and the wider sterling union. The Scottish government would be issuing its own bonds but in sterling. It would effectively be borrowing in a foreign currency and would have no ability to print money. Accordingly, the markets are likely to demand a higher yield premium on Scottish 10 year and 30 year bonds than rUK Treasuries and present UK Treasuries.

Q. Are there any implications for the Scottish government's fiscal - tax and spend - policies of a politically independent Scotland remaining in the sterling monetary union?

A. Yes, the BOE and the rUK government would require the Scottish government to observe an agreed set of fiscal rules which would likely cover limits on the scale of borrowing, the size of the primary budget deficit in relation to Scottish GDP and the level of Scottish government debt to GDP. The demands from the rUK government could be quite restrictive. Accordingly, the Scottish government might not observe these rules and the financial markets would be uncertain what would happen if Scotland, being unable to print or change the value of its own currency, defaulted on its debt. We have seen the difficulties this has caused with the financial markets in their uncertainty about whether the ECB will support member states by buying their bonds. Again the result would be Scotland's sterling denominated bonds trading at a premium to present UK Treasuries.

Q. So, would full fiscal autonomy in the present UK political and monetary union be better?

A. This could be either a better or worse solution than political independence. It would almost exactly mimic the situation in the Eurozone, with what happened in Greece being the worst case - admittedly unlikely - scenario. The likely outcome under full fiscal autonomy for Scotland within the UK is that the UK government would unilaterally adopt a US State solution where the Fed and the Federal Government explicitly refuse to bail out states - see John Kay here. Markets then price in the perceived greater risk of default by charging a premium. Scotland's bonds would trade at a premium for the reasons noted above. John Kay notes California's issue of 30-year Build America bonds at a yield 325 basis points (3.25% points) above comparable US Treasuries. The premium could be less than under political independence if the markets believed that being part of the UK political union made a bailout, if required, more probable. The premium could be higher than under political independence with a separate currency if the markets believed that no bailout from the UK government was credible. Having a separate currency offers the possibility of a devaluation, higher growth and hence higher tax revenues, so limiting the risk of default.

Q. Alex Salmond has said that a British chancellor would be "biting our hands off" for an independent Scotland to keep the pound. Is that fair comment?

A. It is true that the contribution of oil and whisky exports is favourable to the UK balance of payments and to UK tax revenues. Sterling probably trades at a higher rate because of this. However, if the UK government was not receiving the tax revenue from the income earned by these exports it might baulk at the penalty paid by UK exports of manufactured goods and financial services through the loss of competitiveness due to the higher exchange rate. Accordingly, while the UK government might reasonably wish to hang on to the tax revenues, and keep Scotland within the UK political union, I can't see how Alex Salmond's statement can be correct.

Q. Given what you say might it not be better if Scotland adopted its own currency?

A. A case can be made for an independent Scotland having its own currency. At the most basic level, if Scotland's competitiveness began to move out of line with its main trading partners then the nominal Scottish currency would adjust to maintain the real exchange rate. A loss of/rise in competitiveness would lead to a fall/rise in the nominal exchange rate. But as I noted in this post it would be extremely dangerous if Scotland immediately adopted its own currency. The exchange rates of currencies of small independent states are extremely volatile unless they link in one way or another to a larger monetary union. The small scale of the foreign currency reserves held means that such countries are extremely vulnerable to speculative attack, extreme swings in their exchange rate, the exchange risk and heightened uncertainty for business. A small country would have great difficulty in smoothing the path of its exchange rate, without running the risk of inflation or deflation. It would therefore have to strike a deal with a friendly neighbour - the rUK? - for their central bank to step in to support its currency and withstand speculative attack. Denmark has such an arrangement with the ECB so that its currency can trade within the limits of the old ERM 2. But such an agreement would again come at a price of required monetary and fiscal restrictions, which an independent Scottish state might not find acceptable.

Q. So, it's going to have to be the Euro then if Scotland does go independent?

A. Are you kidding?

Scottish trade: not the French connection

The Scottish Global Connections Survey 2010 published yesterday provides a dramatic indication of the importance of the trade connection with the rest of the UK.

There are problems measuring exports from Scotland to the rest of UK, so the figures must be viewed with caution. But the scale of the trade is so large that it is reasonable to assume that any measurement error would not change the large significance of rest of UK trade.

Total exports in 2010 amounted to £67 billion, with exports of goods and services to rest of the UK amounting to £45 billion or 67%.

These figures underline the importance of sterling to Scottish trade. Break the sterling link and there is no doubt that Scottish trade would suffer. If an independent Scotland keeps sterling and opts for a second best monetary relationship with the UK monetary authorities would trade be at risk? One answer is no, because both Scotland and rUK would - it is expected - continue to be in the EU single market. But would the subtle protectionist barriers that Scottish exporters confront when trading with other EU countries such as France, reflecting the pursuit of narrow national interest, gradually begin to cast a shadow over Scots-rUK trade?

After the fall: state of the UK economy

Is the fourth quarter 2011 fall in real GDP of 0.2% a harbinger of worse to come, or just a blip? The question cannot be answered with much certainty. However, the Economic Review that was published by the ONS today along with the estimate of fourth quarter GDP does provide some food for thought.

Overall, the economy has still to recover 55% of the output lost in the recession. That is, GDP is around 4% below its pre-recession peak. It is the production sector and construction that is displaying the greatest weakness, with manufacturing (-0.9% in the quarter) contributing most to the decline, while the service sector slowly recovers - see chart:

But mining and quarrying also contracted by -1.1% in the quarter and the ONS cites the drop in North Sea Oil production as a key factor. Indeed, the sustained weakness of oil production in the UK is shown to be a contributory factor in the weakening UK trade position.

The ONS notes

The deficit on trade in petroleum and petroleum products of £4.5 billion in the three months September to November is almost three times the £1.4 billion deficit in the same period of 2010. An important factor behind this fall has been a 16 per cent drop in crude oil export tonnage as a result of falling North Sea output. The volume of crude oil exports has now fallen by about 20 per cent from 2009 levels, and has more than halved since 2001. The corresponding volume of imports has increased by nearly 40 per cent since 2001, and by more than 11 per cent over the past year.

On the day that Alex Salmond launches his pitch for Scottish independence these oil production and trade figures must be a major worry for the nationalist cause.

The near term prospects for production output, which contributes 15% to overall UK GDP do not look promising, as this chart shows

Most of the broad product groupings are either exhibiting a downward trend or flat growth. The downward contribution of energy is clear, as is the contribution of intermediate goods. Moreover, both consumer durable and non-durables are contributing little to growth, with no sign of an upturn. This clearly reflects the state of UK consumer demand as households continue to pay down debt and deal with declining real incomes.

And services?

The ONS Review highlights the role of Government & other services in recent growth as the chart shows.

The performance of Business services & finance is encouraging and should support future growth. But with fiscal consolidation beginning to bite the contribution from Government & other services might be expected to diminish.

The recovery was meant to be based on a switch from domestic to external sales, from consumption to investment, and from public to private. There is little evidence of this occurring much in these latest statistics.

These data suggest that we might expect to see more negative GDP growth in the UK in the first half of this year, or at best stagnation.

A(s)d(a)ditionality

Let's not get too excited about the 5,000 new jobs that Asda promises to create with its programme of new store investment and store refurbishment in the UK. Three new stores are promised for Scotland.

There will clearly be welcome benefits from this investment programme. Building work will create, for a while, much needed construction jobs. Shoppers may be offered more choice and perhaps at a better price and quality as the investment increases competition with Tesco, Sainsbury, Morrison and other large supermarkets.

However, it is unlikely that these outcomes will be the same as what economists call the additionality of the investment. Jobs may be displaced from the other supermarkets, from the high-street, from village grocers and speciality shops. Moreover, the new jobs created in supermarkets may be more likely to be part-time than jobs on the high street. Nobody knows for certain. There is a lack of academic studies in this area. One review of the literature (Sparks, 2000) concludes on the job creation debate

We do not know the answers and indeed the answers should be of little decision-making consequence. .... Claiming superstores 'create' jobs and we should therefore have them locally is not the sole valid planning consideration. Superstores however do concentrate employment and modernise facilities through their efficiency and approach. ... (I)t is understandable if some local authorities and retailers seek to develop such stores in particular areas to improve the locality and to provide a local job focus. They have to recognise however that there will be both positive and negative consequences of this decision.

What economics tells us is that large supermarkets mainly compete for local income. Clearly, their 'local' is a bigger market area than the corner shop. But, by and large, the proposed new supermarkets will be competing for given household spending in a town or travel to work area. This is why one should not expect much net job or, more accurately, work creation. Indeed, as Sparks's notes the efficiency of the supermarket can mean that for a given £1 spent on retail, less labour is required to provide it. When it all works through there may be less work on offer. If so, the consumer may still benefit by lower prices, convenience and greater variety. But it's not the jobs bonanza implied in the media today.

Martin Simpson: Medley of Celtic Airs

A reminder of the beauty of Celtic music and the guitar playing of the great Martin Simpson. See him in Glasgow at Celtic Connections on Thursday, 26th January, 2012. I'll be there.

Scottish Independence: some basic economics

Martin Wolf in the Financial Times today offers an important contribution to the debate on the economic outcome for an independent Scotland. He focuses on three aspects: the fiscal future, monetary future, the future of Scotland's financial industry.

For Wolf, Scotland's fiscal future as an independent state depends on its share and the behaviour of North Sea oil revenues and its inherited share of UK government debt. On oil, the chart below plots the revenues since 1980-81. Two facts stand out: the revenues are variable and, despite the rise in oil prices over the last 10 years, they are in decline.

Government Revenues from UK Oil and Gas Production (2009/10 prices)

Source: Government Expenditure and Revenue Scotland 2009-2010

On debt and debt interest in 2009-10 UK net debt to GDP was 53% by 2013-14 Wolf notes that it will peak at 71%. Indeed, as the chart below shows it is now expected by the UK Treasury to peak at the higher share of 78% of GDP in 2014-15.

Martin Wolf comments

A newly independent small country with sizeable fiscal deficits, high public debt and reliance on a declining resource for 12 per cent of its fiscal revenue, could not enjoy a triple A rating. Its costs of borrowing might be far higher than those of the UK. To avoid the risk, it would need to lower its debts quite rapidly. This would require even greater austerity than in the UK as a whole. Given its close ties to the rest of the UK, Scotland could not get away with taxing corporations or skilled people more heavily than its neighbour. So the bulk of this extra austerity would surely fall on public spending.

I think Wolf's judgement is broadly correct, even though we must remain sceptical about the role of the ratings agencies. The experience of small independent countries such as Denmark, and Sweden shows that they can enjoy low borrowing costs, often lower than the UK. But such lower costs have to be won by convincing the markets that the government will be fiscally prudent, stable, with good growth prospects. Building that reputation takes time.

We can go further than Wolf and note that the evident volatility of the oil revenues given their importance to the overall Scottish budget, will pose problems in the planning of future expenditures. We need to know from the advocates of Scottish independence how they propose to deal with this. A prudent Scottish Chancellor might decide that it may be better to bank some or all of the oil revenues in an 'Oil Fund' for future investment and contingencies. But if he/she does that then public spending would have to be reduced further.

Wolf does not discuss the SNP's view that tax policy, via lower corporation tax, would boost the growth of the Scottish economy and hence the flow of tax revenues. It would be interesting to see the analysis of the expected return from a lower corporation tax and the scale of the anticipated revenues in an independent Scotland. It does appear that the nationalists are putting a lot of eggs into the corporation tax basket with little evidence that the return would be sufficient to prevent the factors likely to depress public spending, noted above, and growth, noted below. Moreover, the right to vary corporation tax may be an option within the UK union. Northern Ireland seems to think so.

On an independent Scotland's monetary future a key issue as Martin Wolf notes is the choice of currency. It would be extremely dangerous if Scotland immediately adopted its own currency. The exchange rates of currencies of small independent states are extremely volatile unless they link in one way or another to a larger monetary union. The small scale of the foreign currency reserves held means that such countries are extremely vulnerable to speculative attack, extreme swings in their exchange rate and the exchange risk and heightened uncertainty for business.

George Kerevan has recently argued (14 January in Scotsman - no link) that a Scottish central bank would easily be able to retain parity with sterling by buying and selling Scots pounds. But given the small size of Scotland, the inflationary risks that would result from his proposal would be considerable. He cites North Sea Oil discoveries and investment as likely to push up the Scots pound exchange rate. And he considers the purchase of foreign currency required to stabilise the exchange rate to be a great advantage because it would give the government 'healthy reserves'. But he fails to appreciate the inflation risk of such a policy as we have seen recently with the Swiss franc. Moreover such a policy might still fail and so the government in order to sustain the policy would have to adopt capital controls, which could have a negative effect on Scotland's integration into the world's financial markets and the global economy. Failure of the policy would lead to a rising Scots pound and, given the greater importance of oil to Scotland than the UK, the emergence of a 'Dutch disease' problem. Scottish trade in other goods, especially manufacturing, would become increasingly uncompetitive, the industrial base would erode, the dependency on oil would rise and the economic future would be bleak once the oil had gone.

The Chief Secretary to the Treasury Danny Alexander's speech in December to the SCDI, clearly articulating the Treasury view, nevertheless gets the economics on this issue quite right.

Firstly, a single currency over an appropriate area lowers transaction costs in trade. It improves price comparability but more importantly, eliminates the exchange rate risk and the need to hedge against it. Secondly, it helps to impose discipline over inflation by limiting the ability to use exchange rate devaluation to compensate for high domestic inflation. And thirdly, it provides the exchange rate stability that many smaller, open countries yearn for. .... In many ways monetary policy set by the Bank of England is already suited to Scotland given that the United Kingdom and the pound exhibit many of the characteristics of a so-called 'optimum currency area'. For one, Scotland and the rest of the UK are very similar in their industrial structure, business cycle and price volatility.

 

In addition to the similar industrial structure, business cycle and price volatility Scottish productivity is now much more in line with the UK, but not the core Euro members, as this chart shows. Although, clearly, it is rates of growth of productivity that are key.

Source: Scottish Government, High Level Summary of Statistics Trends - Chart data, http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/TrendData

It therefore follows that it would be foolish for Scotland to give up the £ sterling for the Euro or a Scots pound. Almost all other variants around sterling such as 'dollarization' or 'sterlingisation' or pegging are significantly second best alternatives to the status quo.

Martin Wolf concludes by noting that given the importance of Scotland's financial centre an independent Scottish government would not have the fiscal resources to back these institutions if they got into difficulty. Hence there is a risk that activities that do much of their business in the residual UK will move south to the UK where security for their depositors and investors will be greater.

Martin Wolf's article provides a dispassionate analysis of the economic issues confronting an independent Scotland. Can the advocates of independence address the issues he raises in a similar dispassionate manner?

Super Wednesday

Today saw the publication of a plethora of outturn data and survey findings on the Scottish economy. The main outturn data were the official third quarter 2011 GDP figures, the manufacturing export index for the third quarter and labour market statistics for September-November. The survey data refer either to the final quarter of last year or December. I shall focus in this post on the official outturn data.

The basic picture continues to be one of weak recovery with a further weakening apparent towards the end of 2011.

GDP grew by 0.5% in the third quarter identical to UK growth, compared to 0.2% in both the second and first quarters. While this rate of growth is close to the trend rate of growth it is weak for the recovery phase of the business cycle.

The chart shows that Scottish GVA now stands at -3.3% below the pre-recession peak, while the figure for UK GVA is -3.6%. However, while the depth of the recession was greater in the UK than Scotland, the recovery of UK GDP has been slightly faster than in Scotland.

At the broad sectoral level services (0.9%) and manufacturing (0.6%) were the main drivers of third quarter growth. Indeed, the Scottish performance was stronger than in UK services (0.7%) and UK manufacturing (0.1%). So some comfort from a Scottish standpoint can be drawn from the latest data. But the performance of both sectors was weaker in Scotland over the year. Moreover, the construction sector was much weaker in Scotland in the third quarter contracting by -1.2% compared to an increase of 0.3% in the UK. It is worth noting, though, that over the year the performance of Scottish construction was slightly better with growth of 5.9% compared to 5.4% in the UK.

Manufacturing exports grew by 0.2 per cent in real terms during the third quarter of 2011. But this represented a weaker performance than the second quarter, which in turn was weaker than the first quarter.

In the labour market the weakening continued as net job creation fell and unemployment rose, both at a faster rate than the UK. Employment fell by 8,000 and unemployment rose by 19,000 in the quarter and by 5,000 and 7,000, respectively over the year. The rate of job loss and unemployment increase was greater than in the UK. There was some net job creation in the UK (18,000) despite the rise in unemployment of 118,000 and percentage rise in unemployment of 9% in Scotland compared to 5% in the UK. The weakness of the jobs recovery is underlined by the following chart:

The Scottish labour market is -3.56% below its pre-recession peak compared -1.41% in the UK. Moreover, when we allow for the growth of working population we see that the ratio of jobs to the supply of labour has hardly recovered at all as shown by this chart.

With unemployment now standing at 231,000 (8.6%) this is little different from the level of unemployment of just under 237,000 (8.8%) at the bottom of the recession in the labour market in May-July 2010. Furthermore, Scotland's strong unemployment position compared to UK regions has slipped a bit as this chart shows:

Further analysis of the latest GVA and labour market data will be provided in the Fraser of Allander Institute's Economic Commentary which we expect to publish at end February/early March.

Fiscal austerity, expenditure and UK GDP growth

I have been thinking further about the prospects in 2012 and beyond for both Scotland and the rest of the UK economies. The latest outturn and survey data suggest that growth weakened further in the final quarter of last year. Consumer price inflation (CPI) is now clearly reducing as predicted. Today's CPI figures for the year to December indicate a rate of 4.2%, a sharp fall on the 4.8% increase to November. Christmas discounting in clothing stores and supermarkets plus the softening of fuel prices played a big role. But whether directly or indirectly, the slowing of inflation reflects a weakening of demand in the domestic and global economies.

The November 2011 forecast from the Office of Budget Responsibility (OBR) predicts weak growth of 0.9% this year followed by a bounce back to 2.1% in 2013, almost to trend. Forecast growth strengthens thereafter to 2.7% in 2014 and 3% in both 2015 and 2016.

What is more interesting than the aggregate forecast is the contribution to GDP change of the key expenditure components - see first chart.

So which components contribute the most to recent growth and to forecast growth?

The bounce in inventories in 2010 was a temporary influence on growth. Further adjustments might be expected if companies' expectations of demand are not met. But the OBR is not expecting much impact on forecast growth.

Between 2010 and 2011 there are two key narratives.

First, there was a switch from domestic demand to external demand as the main driver of growth. Private consumption went from 0.7% growth to a contraction by the same percentage. Business investment similarly went from 0.1% growth to a fall of -0.1%.

Secondly, government consumption and investment expenditures contributed positively to growth in both years by 0.4% points and 0.3% respectively. "Hang on!" I hear you say. "I thought the economy was suffering from the effects of fiscal consolidation. What is going on?"

A good question.

It is important to be clear about what is happening. Even amongst people who should know better there is a tendency to present the slowdown in the recovery as being unrelated to the government's fiscal austerity programme. So in their recent analysis in the FT Chris Giles and Andrew Bounds suggest that

A core problem has been deficient growth, which has persistently fallen short of expectations and kept unemployment well above the levels of most of the 1990s and 2000s. ..... Most economists see the fierce political arguments as of little relevance to the question of why the economy has disappointed expectations so greatly. The Office for Budget Responsibility, the independent body charged with advising on the public finances, explains its forecast downgrades not with reference to spending cuts or tax increases but by "higher than expected inflation squeezing household incomes and consumption".

It would be easy to read this and conclude that fiscal austerity is not slowing the economy and that the slowdown is due to a reduction in real personal disposable incomes due to higher inflation than expected.

Of course Giles and Bounds are not talking about the slowdown in the recovery per se. They are actually discussing why the OBR got its forecasts for 2011 badly wrong. This is a different issue. The following chart, again from the OBR, shows the outturn and OBR's forecast for the contribution of government spending to UK GDP growth in subsequent forecasting rounds.

What is clear from this is that government spending in 2010 made half the contribution to growth as in 2009. In 2011, which contains a forecast for the fourth quarter and outturn for the first 3 quarters, government spending again made a positive contribution to growth, all be it somewhat less than in 2010. The reduced contribution of government spending to growth represents the direct effect of the fiscal spending consolidation so far.

It seems probable that the positive contribution to growth in 2011, when the OBR had previously been forecasting a negative government spending contribution, is the result of the effect of automatic stabilisers on spending. The effect of automatic stabilisers is usually considered in terms of transfer payments such as unemployment benefit and tax receipts but there is academic research evidence that current spending on goods and services by government also has a counter-cyclical element.

The other side of this coin is the OBR's failure to forecast accurately the contribution of household demand or private consumption to GDP growth in 2011 as this chart shows:

The large negative contribution of private consumption to growth in 2011 may have been heavily influenced by "higher than expected inflation squeezing household incomes and consumption." But the drop in household spending may also have been due to the net effect of tax rises, such as the VAT increase, on real incomes.

The OBR's forecasts for 2012 to 2016 envisage a recovery mainly in private consumption, business and dwellings investment, with net trade contributing weakly to growth over the period. The switch from domestic demand to external demand appears temporary - see first chart. The direct effect of fiscal austerity on spending is forecast to bite from this year and gets progressively worse to 2015 and 2016. But the forecast deploys assumptions about private consumption, which, even with inflation falling back to a target 2%, seem 'heroic'.

I expect that the radical difference between the OBR's forecast and the outturn for private consumption seen in 2011 may be seen again over this forecast horizon if the present fiscal policy stance persists.

S&P downgrade no comfort for Osborne

The S&P statement following yesterdays credit downgrade of France - downgraded from AAA to AA+ - and other Eurozone countries should offer no comfort to George Osborne, Germany and those who argue that it is fiscal austerity that is preserving the UK's triple A status. The statement from S&P indicates that it considers the focus on austerity in the periphery to be self-defeating and that it is as much about preserving demand and growth as about effective fiscal management and austerity. I quote at length from Reuter's publication of the statement

The agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.

We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery." As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.

The decision to downgrade the US on 5 August 2011 from AAA to AA+ had a quite different rationale, largely being about ineffective fiscal management and a failure to address long-term debt issues:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

However, as I noted in this post the rating agencies don't necessarily get their judgement of sovereign debt correct and the markets know it hence look at what has happened to the yield on US 10 year Treasuries since.

Yes, the yield has fallen from 2.56% to 1.86%! Other things matter as well as agency ratings.