Reuters Nicolas Sarkozy is in one of the most critical weeks of his presidency as he battles to mend his differences with Germany over a euro zone crisis that threatens both France's economic wellbeing and his own political future. A spike in French bond spreads over German Bunds mirrors the rising pressure Sarkozy is under as the relentless advance of the euro area's debt crisis throws France's top-tier position in the bloc alongside Germany into question. The premium investors demand to hold French 10-year bonds soared to 120 basis points over Bunds, three times the normal level, since Moody's said last Monday it was scrutinizing the outlook on France's triple-A rating in light of slowing growth and costly euro zone bailout commitments. Penned in between hawk-eyed rating analysts and a disgruntled electorate, Sarkozy is grappling with one hand to ensure a euro zone plan promised for Wednesday does not place the burden of propping up banks on the state, and must use the other to find fresh deficit-cutting measures without burying his chances of winning a second term in a 2012 election. France pays very low interest on its debt and last week's jump in yields is mainly psychological —but a prolonged rise could still add to fears that France's AAA-rating is in peril. “The jump in the spread over Bunds embodies everything. This is a dramatic time for France,” said French economist and past government advisor Jacques Delpla. “Since last Tuesday, France suddenly looks like it's in the second division in Europe. If France does not put its house in order, it runs the risk of being put on a negative outlook.” France has been under strain since early summer, as concern grew about the level of its banks' lending to Greece and other peripheral euro zone countries. Market jitters wiped billions of euros off French banking stocks in just days. More recently, two fresh issues have rattled markets: the steady rise in Socialist Francois Hollande's lead over Sarkozy in opinion polls, and the government's admission that it will further revise down growth targets in the weeks ahead. The surge in French bond spreads to their highest since the euro's launch may not be backed by fundamentals, but pessimism is rife in France. Marc Touati, chief economist at Assya Compagnie Financiere, believes 2012 will be France's grimmest year in a long time. “France will certainly lose its AAA debt rating, and we have to prepare for a very strong social crisis. Good luck everyone,” he said, echoing panicky talk among bankers who are now openly asking whether the euro could collapse. Outsiders are more sanguine, but agree much is at stake this week, not least France's standing in Europe after Sarkozy caved in to Merkel and dropped his push for the EFSF bailout fund to become a bank that could tap ECB funding. EU leaders are near agreement on bank recapitalisations and how to leverage the EFSF, but differences remain on other issues and final decisions have been deferred to Wednesday evening. __
