Analysis: As economies diverge, so could fate of EU leaders

PARIS (Reuters) - It has been a miserable year for the European Union's top two leaders.

German Chancellor Angela Merkel has seen her popularity ratings fall, dragged down by squabbling in her center-right government and accusations she mismanaged the euro crisis.

Only one French person in three now says they approve of the job being done by their president, Nicolas Sarkozy, whose government has been dogged by scandals, high unemployment and an unpopular drive to reform the country's creaking pension system.

As both leaders wind up their summer breaks, there is good reason to believe their political fortunes, like the economies they run, may diverge.

Data published last week showed the German economy grew by 2.2 percent in the second quarter of 2010, its best performance since reunification 20 years ago. The German export machine is revving up again and Merkel looks sure to benefit as she prepares to push through an austerity budget whose targets just became a lot easier to meet.

By contrast, the worst seems yet to come for Sarkozy, who faces a re-election fight in 2012. Yes, French growth also beat forecasts in the second quarter, but the 0.6 percent expansion was largely a result of inventory adjustments.

French unemployment remains stuck at 10 percent, three full percentage points above the rate in Germany, and government plans to cut the deficit are based on what many economists say are unrealistic forecasts for a sharp pick-up in growth in 2011.

Sarkozy faces a battle royal with French unions in the months ahead over his push to increase France's retirement age and his late-July attempt to shift the debate away from economic issues appears to be backfiring.

The president's plan to strip criminals of "foreign origin" of their nationality has come under fierce criticism in the French media, split his already fractious UMP party and reinforced voters' stereotypes of Sarkozy as a political opportunist, willing to do anything to drum up support.

"Sarkozy's situation is much worse than that of Angela Merkel's and that is not only because of differences in the economic situation in France and Germany," said Dominique Moisi, a senior adviser at Paris think tank Ifri.

"The disillusion with Sarkozy in France is much deeper. There is a rejection of his essence. It's no longer what he does or doesn't do, but the perception of who he is."

SELLING THE PICK-UP

A few months ago, when the euro zone sovereign debt crisis was at its height, it was Merkel who was on the back foot.

Partners accused her of increasing the costs of a joint EU-IMF bailout for Greece by resisting the quick aid package favored by other leaders, including Sarkozy.

An 80-billion-euro deficit-cutting plan, unveiled by her government in early June, was denounced as anti-European, a move that would depress domestic demand in Germany and make it more difficult for ailing peripheral EU economies to recover.

Now, with Europe's debt crisis receding and Greece on track to meet its ambitious budget consolidation targets, Merkel's tough stance toward Athens seems more prescient than foolish.

Germany's sharp second-quarter rebound, driven by strong exports and supported by a rise in private consumption, has silenced some of the critics who predicted Berlin's savings measures would lead to economic gloom.

"The government can sell the economic pick-up as a consequence of its policies," said Klaus-Peter Schoeppner, head of polling group Emnid. "Merkel will benefit if she can show that average Germans, and not just the big exporters, are profiting from the recovery."

The economy alone will not be enough to restore Merkel's lustre.

For that, she will need to end the sniping in her coalition and forge compromises on the divisive policy issues facing her government in the coming months, including an extension of nuclear power and end to compulsory military service.

BALANCE OF POWER

The economic revival will strengthen Merkel's hand at home so long as it is not endangered by slowdowns in key trading partners such as the United States and China.

It will also bolster her position as Germany and France prepare to push their competing visions for overhauling EU economic governance rules in response to Greece's meltdown and the currency bloc's resulting debt crisis.

Sarkozy sees the debate over EU rules as an opportunity to impose more political control over economic policymaking within the euro zone, an argument he may have more trouble making if the French economy continues to lag behind that of Germany and he remains weak at home.

Merkel, on the other hand, can point to Germany's economic recovery in pressing her counter-argument that other EU states must adopt the same fiscal discipline as Berlin to ensure sustainable growth and ward off another crisis.

"It is still the case that France and Germany must pull together for Europe to work," said Moisi of Ifri. "But for the first time we are seeing a real imbalance. The balance of power is moving very clearly in the direction of Germany."

(Writing by Noah Barkin; editing by Andrew Dobbie)