Factbox: Key political risks to watch in France

PARIS Mon Feb 6, 2012 11:54am EST

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PARIS (Reuters) - President Nicolas Sarkozy risks not making it to the second round run-off of the presidential election on May 6, which would be an unprecedented event in the history of the 50-plus years of the Fifth Republic.

Trailing Socialist frontrunner Francois Hollande, he now has far-right leader Marine Le Pen snapping at his heels in opinion polls, raising the possibility of a repeat of the 2002 election when her father Jean-Marie Le Pen made it to the run-off against Jacques Chirac. Le Pen ultimately lost.

The 2002 election shock saw street protests by hundreds of thousands of young French people and alarm among mainstream political leaders in Europe.

Marine Le Pen wants to ditch the euro currency, as the euro zone battles a debt crisis and deteriorating economic outlook.

A Socialist victory carries its own risks for the euro zone as Hollande, despite a commitment to fiscal rectitude, has pledged to renegotiate an EU-wide pact on budget discipline if elected as well as abandoning other reforms of the French state, such as non-renewal of one in two civil service posts vacated by retiring staff.

Sarkozy, who has yet to declare his candidacy but is widely expected to do so, faces a difficult battle to win support and defend his legacy.

Not only is third-placed Le Pen close behind in opinion polls but fourth placed is centrist Francois Bayrou who has gained ground and is considered by some as a potential threat on a par with Le Pen.

After winning power in 2007 on a promise to break with the past and to cut tax, and a slogan of "work more, earn more", Sarkozy ends his mandate with unemployment at a 12-year high, the economy on the brink of recession and he is raising tax.

His handling of the euro zone debt crisis will be key to his poll performance in coming weeks, alongside public perceptions of his efforts to kickstart the French economy, primarily by lowering corporate payroll contributions to the social welfare system, and to pay for that a rise in VAT sales tax.

2012 ELECTION

Sarkozy has conceded in private that he has had to contemplate the risk of election defeat. Even if it did not amount to a prediction, media coverage of his musings raised eyebrows within his ruling UMP party and pressure from some UMP quarters to declare his candidacy rapidly rather than let things drag out until closer to a March 16 deadline. The first round of voting is on April 22.

In a televised interview on January 29, he refused to be drawn on the issue, but appeared to set out the start of an election manifesto, announcing a swathe of measures aimed at boosting growth and competitiveness.

The impact on his poll ratings remains to be seen - moves such as a hike in VAT to cut labor costs could prove unpopular with voters, but Sarkozy is hoping to get credit for being open with the public and preparing a way out of the crisis.

Hollande, meanwhile, launched his campaign with a rousing speech at Le Bourget in January and unveiled a 60-point manifesto targeting the wealthy and the financial sector.

Promises to reverse a rise in the retirement age and increase spending and public sector jobs have struck a chord with cash-strapped voters, but it remains to be seen whether he can maintain this momentum and continue extending his lead.

At the other end of the political spectrum, National Front (FN) leader Marine Le Pen is stepping up pressure on Sarkozy, reflecting a Europe-wide shift towards the far-right.

Since replacing her father at the head of the FN, she has brought a more acceptable face to the party, toning down hardline rhetoric and capitalizing on economic hardship to sell populist policies.

What to watch:

- Fluctuations in opinion polls in the coming weeks.

- Signs Sarkozy is going to announce his bid.

EURO ZONE CRISIS, ECONOMIC GLOOM

At a meeting on January 30, European leaders, with the exception of the Czech Republic and Britain, agreed on a German-inspired compact for stricter fiscal discipline, in a bid to boost confidence in the debt-stricken euro area.

The accord was welcomed by the European Central Bank which has long pressed euro zone governments to put their houses in order. But doubts remain over Greece's unfinished debt restructuring and the wisdom of restricting spending so severely at a time of floundering growth.

Sarkozy has come under fire at home for giving in to a Germanic view of how he should run the economy.

The economic outlook for the euro zone is looking increasingly shaky, making it tougher for member states to stick to deficit-cutting plans. Spain's economy contracted in the last quarter of 2011, and the government failed to meet its budget shortfall targets. Economists expect France to grow by less than the government forecast of 0.5 percent next year, jeopardizing plans to reduce the deficit to 4.5 percent of GDP.

Sarkozy used his prime-time TV interview to flesh out measures to boost competitiveness and bring down unemployment, currently at a 12-year high and rising.

He hopes to rush them through before the presidential election, but moves such as a hike in VAT to cut labor costs will not take effect until later in the year leaving little room for improvement in the economy before the vote.

For Sarkozy, it's less about immediate results and more about convincing voters that he is the one to guide the country out of crisis. The uncertainty leaves France and the wider euro zone at the mercy of unforgiving markets.

What to watch:

- The outcome of Greek debt negotiations and market reaction to the euro zone fiscal compact.

- Reaction to Sarkozy's reform measures and their progress through parliament.

TURKEY, AFGHANISTAN

Sarkozy faces a diplomatic spat with Turkey after the French upper house of parliament, or Senate, approved a draft genocide law making it illegal to deny the mass killing of Armenians by Ottoman Turks nearly a century ago.

Ankara has threatened to cut diplomatic ties and take "permanent steps" if the bill is ratified, but Sarkozy shows no sign of backing down, promising to make the bill law at the start of February.

Turkey cannot impose economic sanctions on France, given its membership of the World Trade Organization and its customs union accord with Europe, but French firms could lose out on state-to-state contracts, notably in the defense sector.

Afghanistan is also on the election radar after the killing of four soldiers by a rogue Afghan soldier brought about a review of France's military presence in the country.

After first flagging the possibility of an accelerated pull-out, Sarkozy said French troops would return home in full by the end of 2013, but with withdrawal from combat in the Kapisa area happening more rapidly. Hollande has promised a pull-out by the end of 2012 if he takes power.

Afghan President Hamid Karzai has promised better security for soldiers but more rogue attacks on soldiers in the weeks or months ahead could reignite calls for an early withdrawal.

What to watch:

- Whether Sarkozy really will ratify the law on genocide or back down in the face of Turkish pressure.

- Developments in Afghanistan, and improvements in security.

SYRIA, IRAN

With the crackdown on anti-government protests continuing in Syria, western powers are under pressure to find a solution to the unrest which has cost more than 5,000 lives.

France and Britain, in conjunction with the Arab League, have crafted a United Nations Security Council resolution for political change in the country, and have said they have enough backing on the 15-member council to take it to a vote.

Russia, which holds a veto on the security council, has said parts of the resolution are unacceptable and wants to hear more from the Arab League's observers in Syria before entering into further discussion.

Tensions with Iran are also coming to a head after the EU, led by France, Britain and Germany, last month banned imports of Iranian oil in continuing efforts to get the Islamic State to scale back on its nuclear ambitions.

The embargo is set to come in gradually to give struggling countries time to adapt and find an alternative supply, but Tehran has upped the stakes by threatening to cut off exports to the EU immediately. At a time of rising fuel prices, and weak economic growth, the move could send oil prices higher and deal a blow to the EU economy.

What to watch:

- Progress by France, Britain and the Arab League in pushing a resolution on Syria through the U.N. Security Council

- Moves by Iran to cut off the supply of oil to the EU

(Reporting By Vicky Buffery; Editing by Brian Love)

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