Berlin and Paris Battle Contagion: The Weakness Behind Sarkozy's European Vision

Members of the French National Assembly and Senate listened attentively last week to a briefing from their president. As he does every Tuesday, Nicolas Sarkozy had invited leading representatives from within his governing party to breakfast at the Élysée Palace. There was nothing out of the ordinary about the weekly routine. Nor was it a surprise that at last week's breakfast, the French president addressed the euro crisis and the difficult negotiations over aid for Greece. But then, Sarkozy formulated his thoughts in a way that baffled his audience: "I spent the night with Germany."

But was he able to get any sleep?

Thinking about Germany has become a French obsession, because France is worried. It is wondering whether Germany will remain true to the European Union and the euro. Will Germany choose solidarity over discipline? Will Germany ultimately accept the measure that prevailing Parisian opinion considers inevitable and agree to collectivize national debt within the euro zone?

In any case, Sarkozy let one glimmer of hope peek through. "The good news," he told his ministers, "is that Angela is moving in a sensible direction in terms of saving the monetary union." Left unspoken: "But if it weren't for me...."

A Waltz of Indecision

The French president and the German chancellor are engaged in a dance that some close to the Élysée Palace have described as a "valse-hésitation," perhaps best translated as a "waltz of indecision." It's an endless back and forth that must often seem, to its anxious audience, deliberately designed to confuse. That audience consists of the 15 other members of the monetary union and, worse still, the teetering financial markets.

Following a short telephone conference between Sarkozy, Merkel and Greek Prime Minister Georgios Papandreou last Wednesday, the leaders were only able to reach consensus far enough to issue a bare-bones communiqué, with no new decisions being made. Sarkozy and Merkel declared themselves "convinced" that Greece's future lies with the common currency, while Papandreou reiterated his "absolute determination" to come through on all his country's commitments -- a non-negotiable condition in order for the country to receive the next round of aid, €8 billion ($11 billion), in mid-October.

Beyond that point, confidence remains fragile. Jean Leonetti, the French National Assembly minister responsible for European affairs, claims that the danger of Greece going bankrupt, or even being ejected from the euro zone, is off the table for good. "That's completely out of the question," the minister asserts, adding that this also defuses the threat of the problem spreading to other shaky euro-zone members. "That's a problem only as long as Greece's fate hangs in the balance," he says.

Domino Affect Could Spread

In reality, though, Sarkozy is not quite so sure, despite the fact that his clumsy partner in this political dance, Angela Merkel, has taken some steps in his direction. "We're leaving a zone of turbulence only to enter a possible crash zone," the president says. If it isn't possible to save Greece, or if Greece doesn't want to be saved, he continues, the main aim will be to avoid "at all costs" a domino effect that could spread to "Portugal, Spain and Italy."

It's becoming increasingly difficult for Sarkozy to conceal his rising panic when he runs through that list of countries at risk. And though he wouldn't give voice to such views even within the circle of his closest confidantes, Sarkozy has been aware for some time of the need to add his own proud nation, which has always claimed the role of Europe's visionary, to the list of the sick and the lame.

No wonder, then, that Angela Merkel has to stick by his side and lend a supporting arm as he tries desperately to lead the dance. The music only plays as long as the chancellor promises to pay.

France's financial institutions have drawn the markets' mistrust for having too many bonds from debt-stricken EU nations in their portfolios, not only from Greece, but also from Italy and Spain. As expected, credit rating agencies have downgraded the Crédit Agricole and the Société Générale by one rating level, to Aa2 and Aa3 respectively. That alone isn't a catastrophe, since the banks continue to yield profits and have increased their equity. But a debate over the possibility of partial or complete nationalization quickly flared up, partly triggered by the start of France's presidential campaign season.

And when executives at Paris' banking headquarters start to tremble, the fever spreads quickly to high-level politicians. "I'm not sure if the French people really understand what's going on," Sarkozy has complained. He believes there to be general misjudgement of the situation.

His prime minister, François Fillon, is seized sometimes by a bewildered rage. "I've been trying for two years to shake some sense into the political classes that don't want to believe we're staring into the abyss," he says. "We're on our last legs here."

Sarkozy and Fillon sense it will hardly be possible to maintain the appearance that all is well through to the end of this election campaign. More and more people are sounding the alarm, everyone from financial experts to politicians. Jean Peyrelevade, former head of Crédit Lyonnais, a French bank which has since been bought up and renamed, has diagnosed France as being in "critical condition" and says the country has been in a continuous economic decline for the last 10 years. "With recklessness and arrogance, France continues to live in its economic bubble, convinced it will never burst. The hard truth of statistics is unrelenting in its proof that the opposite is true," Peyrelevade says.