The French government may appear to be unperturbed by the decision of ratings agency Moody’s to downgrade its sovereign rating from Aaa to Aa1, with a negative outlook, but the development has served to refocus attention on the country as a source of concern for the wider Euro Zone.

Moody’s gloomy assessment of the French economy comes in the wake of a number of reports that have expressed similar reservations, including Standard & Poor’s, which downgraded the country at the start of the year.

Last month, the International Monetary Fund in a report, urged the country to embark on a “comprehensive” programme of structural reforms and warned that the country had already suffered a “significant” loss of competitiveness, which would only deepen if it failed to keep pace with reforms taking place in other European nations including Italy, Spain and Germany.

The government has taken a number of steps to address these concerns. Former EADS CEO Louis Gallois was commissioned to draw up recommendations for reform, and following the publication of the report last month, the government announced €20 billion worth of cuts to labour costs, funded by increases to VAT and cuts to public spending.

However, the move has done little to improve overall sentiment, having followed a number of other steps that were seen as regressive by the market, including reversals to the previous government’s pension reforms and other labour reforms.

The Moody’s report reflects many of these concerns, pointing to “multiple structural challenges” including a lack of competitiveness and rigidity in its labour, goods and services markets, and an uncertain fiscal outlook as a result of its weakening economic conditions.

The downgrade has had little impact on market sentiment: fears about France are more longer term than the more immediate concerns about Spain, Ireland or Greece.

“French weakness is more important for the way the Euro Zone crisis is managed,” says Christian Schulz, senior economist at Berenberg Bank.

“If France were in a better fiscal and competitive position it could balance Germany’s weight much more and get a different kind of crisis response.”

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