France: The honeymoon is over

French President Nicolas Sarkozy’s pro business reform agenda is breaking down.

French President Nicolas Sarkozy isn’t feeling much love these days, and we’re not talking about media speculation over an alleged affair between his wife, Carla Bruni, the French-Italian model/singer, and musician Benjamin Biolay. Nor are we referring to unconfirmed reports that Sarkozy has sought comfort with his ecology minister, Chantal Jouanno. No Sarkozy’s rockiest relationships are with French voters, and worse, with the country that bestrides Europe like a colossus, Germany.

“I certainly don’t have time to deal with these ridiculous rumours, not even half a fraction of a second,” the French leader told British reporters after being peppered with personal questions during a recent press conference with U.K. Prime Minister Gordon Brown. “You must know very little about what the president of the Republic actually has to do all day,” he fired back at a French reporter who brought the topic up.

True enough. After losing the widespread affection of his people in recent regional elections, France’s former man with the mandate is running out of time to follow through on his promised “rupture” with the past. And that means the stability of the European Union’s second-largest economy could eventually go into the trough along with Europe’s so-called economic PIGS (Portugal, Ireland, Greece and Spain).

After being elected in 2007 using the slogan “Work more to earn more,” Sarkozy inherited a nation with a sluggish economy, high unemployment, declining competitiveness and low productivity. “The people of France have chosen change,” he told supporters who helped defeat socialist leader Ségolène Royal. He then gave a passionate victory speech that sketched out a stronger global role for France and promised to waste no time making the national economy a much more business-friendlyplace, with controversial labour-market, pension, education and constitutional reforms, not to mention tougher measures on crime and immigration.

In February, Sarkozy was meeting with trade unions and business groups to discuss the “2010 social calendar.” Proposed pension cuts were the main topic, though plans to make it easier to relocate or fire public-sector workers (who currently enjoy guaranteed employment) were also on the table. But during regional elections in mid-March, the socialist opposition won 21 of 22 regions, a sharp rebuff that seriously threatens his ability to deliver on the promises that brought him to power. After a quick cabinet shuffle, Sarkozy insisted his agenda is alive and well. But even before the financial crisis, the reform movement was stalled by the need to stimulate the economy rather than cut spending.

European papers call the election result a resounding slap in the face for French conservatives. According to Italian daily Corriere della Sera, Sarkozy is at a crossroads, and “everything indicates that he will follow the path of renouncement and confirm the unwritten rule of his predecessors, who took the Elysée with promises of revolution but preserved their hold on it with the ‘ marche tranquille.’”

And that’s too bad, because unemployment has reached double digits, corporate taxes remain well above the Organisation for Economic Co-operation and Development average, and government debt could top 90% of GDP next year.

But the really chilly reception is found on the European stage, where German chancellor Angela Merkel has just outright rejected Sarkozy’s desire to deal with budgetary woes in Greece as an internal EU matter.

When it comes to the ening of Europe’s Greek tragedy, France has almost US$80 billion at stake, almost twice the German exposure. Yet Sarkozy has been forced to accept a rescue plan involving, if required, the International Monetary Fund. The IMF, of course, is currently run by Dominique Strauss Kahn, one of Sarkozy’s political foes and a possible contender for his job.

When Sarkozy was elected, fund managers at New Jersey–based Cumberland Advisors were excited about the possibilities for investing in a pro-business version of the EU’s second-largest economy. Now, says Cumberland chief economist Bill Witherell, a former OECD director for financial affairs, the investment firm is “rather less pumped. Sarkozy is in trouble and the eurozone is in trouble.”

Cumberland is now in a wait-and-see mode. “I think after much internal wrangling,” Witherell says, “the eurozone will likely emerge stronger in the second half, and as the recovery quickens, Sarkozy may be able to recover some of the credibility he has lost. The reform clock in France has definitely slowed, but I don’t expect it to be reversed.”

Nevertheless, after Sarkozy bowed meekly to Germany’s demands over bookkeeping troubles in Athens, some observers see a fundamental shift in the EU power structure. According to Peter Zeihan, a geopolitical analyst with Stratfor Global Intelligence, the imposition of Germany’s will on France could signify a political takeover of Brussels by German interests.

“What if, instead of the euro being designed to further contain the Germans, the Germans crafted the euro to rewire the European Union for their own purposes?” the analyst asks in a recent commentary, noting German Finance Minister Wolfgang Schauble has said the eurozone should eject any member that can’t right their own finances.

There is no legal way to do this. But Zeihan insists Schauble doesn’t make empty threats. “Germany,”he adds, “now appears prepared not just to contemplate, but to publicly contemplate, the re-engineering of Europe for its own interests. It may not do it, or it may not do it now, but it has now been said, and that will change Germany’s relationship to Europe.”

And that means Sarkozy could have a heck of a historic relationship problem on his hands.