Hanging on

France and Germany have ridiculously split the European Union summit in two. Disagreements between the two countries have become so intense that they were forced delay their much-ballyhooed ‘grand plan’ to tackle the euro zone’s debt crisis. But Germany has the upper hand.

The major bone of contention is how to beef up the European Financial Stability Facility, the euro zone’s bailout fund. However, Nicolas Sarkozy is likely to compromise yet again in order to keep Angela Merkel on board. The French president knows the euro zone could hardly survive a major crisis between Paris and Berlin. He also fears that without German support, France might be next in the markets’ sights.

The Franco-German alliance that has been at the core of the European Union and is the foundation of the euro zone has become uneven of late. Germany’s economic performance now gives it senior partner status. This makes the current German government’s seemingly endless vacillation over the country’s European commitment even more unsettling.

Ever since the debt crisis started, French officials have explained that Nicolas Sarkozy’s uncharacteristic discretion is a sign of his willingness to help Angela Merkel overcome the strong opposition she faces domestically. Luckily Sarkozy isn’t facing the same political hostility to sovereign bailouts at home. But now that France is at risk of losing its triple-A rating, it may have reached the limit of what it can do financially to help solve the euro zone’s problems.

France originally wanted the EFSF to become a bank, which would have allowed it to access funding from the European Central Bank. But this is a no-go both for the ECB and the German government, which fear it might become an open-ended commitment by the central bank. It now looks like Sarkozy is ready to accommodate Merkel, seemingly against the advice of his own Treasury, and agree to a plan whereby the EFSF could offer first-loss insurance on new sovereign bonds.

This approach raises other difficult issues – notably whether the insurance will have adverse consequences for the countries it is supposed to help. But Sarko’s accommodative stance clearly shows that he wants the Paris-Berlin tie to remain strong – which is crucial both for the euro zone as a whole, and for France’s immediate future.