ANALYSIS:"I WILL do everything in my power to preserve Europe's solidarity and its strength," French president Nicolas Sarkozy said in the shadow of the Arc de Triomphe at the annual Armistice Day ceremony in Paris yesterday. This sort of rhetoric is standard for an occasion that has become an annual reaffirmation of the Franco-German couple, but few could have missed the urgency in Sarkozy's voice yesterday.
For all French leaders since Charles de Gaulle, the idea of fighting for a stronger Europe has meant fighting for a stronger France. Never has it been more true.
After a punishing week, France finds itself frantically battling on several fronts to retain its stature and position itself for whatever configuration emerges from the euro zone’s existential crisis.
Economics are at the root of its worries. The nerve-wracking market attack on Italy this week brought into the open a fear that had been largely unspoken here – that France is acutely vulnerable to the spreading unease among investors. "After Greece and Italy, France?" asked Le Monde's front page on Thursday. Sure enough, France watched anxiously this week as the interest rate on its 10-year bonds rose to 3.41 per cent – the highest level since July.
When the crisis began, France and Germany were borrowing at about the same interest rate. Now the spread, or difference, between French bonds and those of Germany are at a euro-era record of 1.66 per cent, having jumped 36 points in just a week.
As French officials point out, the widening gap is partly due to a decline in Germany’s own cost of borrowing as investors flock to a safe haven for their money. But there’s clearly more at play than that. France’s budget deficit stands at 5.7 per cent of gross domestic product, public debt is at € 1.7 trillion, and French banks have the biggest overall exposure to Italy (about €307.4 billion as of June), all of which leaves France dangerously exposed in the markets’ game of dominos.
Hoping to staunch the fire in the markets, the government this week unveiled its second austerity package in just three months. It promised to save a further €7 billion next year to keep it on track to balance the budget by 2016 – a feat last achieved by a French government in 1974.
Ministers until recently were under orders not to use the word austerity in public, but this week Prime Minister François Fillon declared plainly that “bankruptcy is no longer an abstract term”.
The government’s problem is that many influential people are not convinced it is doing enough. France’s plans assume its economy will grow by 1 per cent next year, but the European Commission thinks that’s too optimistic and that further savings will be inevitable. Judging by the rising rate on French bonds this week, that scepticism is shared elsewhere. The suspicion is that Sarkozy has held back the most painful cuts because he faces an election campaign next spring. (Charles Beigbeder, spokesman for reform within Sarkozy’s UMP party, tweeted that the “real austerity plan” would come after the election).
Underlying everything Sarkozy says about the French economy is one great fear: that the country may lose its prized triple-A credit rating. A downgrade for the euro zone’s second largest economy would not only be expensive (borrowing costs would rise) and humiliating for Sarkozy: it would be a huge symbolic setback for France. The western partner in the EU’s traditional engine room has already had to come to terms with the shift in political influence from Paris to Berlin that Germany’s unassailable economic supremacy has brought with it.
In some of the major debates within the euro zone over the past year – including on the expanded bailout fund, the haircut for holders of Greek debt and the role of the European Central Bank – France has found itself siding not with the five other triple-A states in the euro zone but with the weak southern economies. Losing the top-notch rating would make this shift look permanent.
The battleground is economic, then, but the stakes are much wider. When Sarkozy made the most pro-federalist remarks of his presidency this week by calling for a two-speed Europe led by the euro zone core, he was confirming what close observers already knew of his hopes for the post-crisis landscape. Paris has consistently pushed for closer euro zone co-operation, aware that its own voice – crowded out by EU enlargement – is amplified in the smaller 17-member forum where large states such as the UK and Poland are excluded.
France already sees a chance to design the reshaped EU that will emerge from the crisis, but its leverage is closely tied to its ability to repel the clouds gathering on its Alpine border.