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Posted at 10:03 AM ET, 01/14/2012

Europe, the credit downgrade and what it means for innovation

Standard & Poor’s downgraded France’s credit rating from AAA to AA+ (for real this time) Friday, along with that of eight other European countries. The downgrade is a blow to France which, as the Post’s Howard Schneider and Edward Cody report, has attempted to stave off a potential ratings drop through spending cuts and tax hikes.

Notably, Germany’s pristine AAA credit rating was left untouched, further empowering the nation and German Chancellor Angela Merkel, as the euro zone works to implement the region’s bailout fund.

But what does the downgrade mean for innovation in the region?

The euro zone has been plugging away at its growing debt crisis for months, with protests in Greece against strict austerity measures making headlines this past summer, and high-pressure bailout-fund negotiations dominating news reports in the fall and winter. These crises and the efforts to mitigate them have made capital investments difficult, if not impossible in some cases. And that means bad news for European innovation.

“Innovation thrives when capital is abundant,” wrote author and Post contributor Francis Tapon in e-mail correspondence Friday. Tapon, author of The Hidden Europe: What Eastern Europeans Can Teach Us cited the high level of venture capital flowing through Silicon Valley — a city-on-a-hill of sorts for those eager to implement a strong innovation ecosystem. “High taxes encourage capital flight. So, if the E.U. tries to solve its financial woes by jacking up taxes, innovation will suffer.”

Nicolas Sarkozy, France's president, and Angela Merkel, Germany's chancellor, react during a news conference at the Federal Chancellery in Berlin in October. (Michele Tantussi - BLOOMBERG)
This means fewer resources for innovations that stand to address long-held problems and concerns — including those related to the environment. For Columbia University economics professor Gernot Wagner, for whom the environment is a chief concern, the downgrades were bad, but hardly surprising, news.

“In the end, these downgrades tell us little we didn’t already know,” wrote Wagner in an e-mail correspondence with the Post on Friday, “but they are a good reminder of how deep-seeded the European debt crisis truly is.”

Wagner, author of But Will the Planet Notice? How Smart Economics Can Save the World and a Post contributor, is doubly worried. “They should serve as a wake-up call for the much deeper crisis facing us.”

The increasing number of credit downgrades and bailouts have led some to be skeptical of the ratings agencies. But Wagner’s skepticism is broader.

“You can bail out Greece, Italy or even the U.S. You can’t bail out the planet as a whole,” he wrote, “yet, we are continuing on our head-on collision course with the planet.”

But, as we’ve written before on Ideas@Innovations, failure and innovation go hand in hand. Setbacks can lead to the creation of new and necessary ideas, discoveries and inventions. So, there may be a silver lining to the downgrade, at least according to Tapon: “Sometimes a good crisis is the mother of invention.”

Read more news and ideas on Innovations:

Wadhwa | It’s China’s turn to worry

Basulto | Meet the new political elite

Nemko | When to say ‘do more with less’

By  |  10:03 AM ET, 01/14/2012

Categories:  Business, Invention, Research

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