* Hollande says France still matters in EU
* Diplomats, ministers say Paris absent on key issues
* Economy, domestic politics sap French influence
By Paul Taylor and Ingrid Melander
PARIS, June 13 (Reuters) - It’s not a good sign when the leader of a G7 nation feels the need to state his country still matters.
That is precisely what French President Francois Hollande did at a meeting of European Union leaders last month after his Socialist party’s humiliating defeat by the hard right National Front in European Parliament elections.
“France is not weakened ... It’s a great country. It’s the country that matters in Europe together with Germany,” Hollande, the most unpopular French leader since opinion polling began, told reporters.
An array of diplomats and officials involved in EU policymaking told Reuters France’s influence, sapped by its persistent economic problems, has been hit further by the election, in which the Socialists came a distant third behind Marine Le Pen’s far-right and the opposition conservatives.
“Hollande is a devalued currency,” a former European affairs minister from one member state said. “If we need something, we go to the Germans. Before, we used to go to the French as a way of bringing the Germans around. Now France is mostly absent.”
Paris was at the forefront of European integration from the creation of the European coal and steel community in the early 1950s to the establishment of a single currency in the 1990s as an ally and counterweight to Berlin.
But its clout has diminished in the last decade due to the bloc’s eastward enlargement, the French rejection of a proposed EU constitution in a 2005 referendum and the country’s economic stagnation and loss of competitiveness compared to Germany.
Since his election in 2012, Hollande has repeatedly said he wants to “reorient” the 28-nation union away from fiscal austerity to focus on promoting growth and employment.
Foreign Minister Laurent Fabius said this week that Paris was preparing proposals for when EU leaders meet later this month to set the bloc’s priorities for the next five years.
Yet diplomats say it is Berlin and Rome that are most likely to shape any new policy bargain, since German Chancellor Angela Merkel’s conservatives and Italian Prime Minister Matteo Renzi’s centre-left were the big winners of the European elections.
Renzi, like Hollande, wants a greater focus on growth, but he is committed to a programme of economic and political reforms that seems more ambitious than the French plan, and he intends swifter implementation.
“People are looking to Renzi now in the way they looked briefly to Hollande in 2012 to stand up to Merkel,” the former Europe minister said, speaking on condition of anonymity.
France has narrowed its public deficit and remains an important military power with a permanent seat on the U.N. Security Council. Its borrowing costs are very close to record lows because bond markets assume French debt has an implicit German guarantee.
But EU officials and diplomats say its status as a repeat offender against EU fiscal rules, its big trade deficit and reticence to open up its economy to more competition put it high on their worry list.
The European Commission expects France to miss its target of bringing the deficit down to 3 percent of GDP next year unless it changes course. But measures recommended by Brussels to ease hiring and firing rules, prune a generous welfare state and curb pension and health costs seem improbable given Hollande’s dwindling political standing.
While unemployment is stubbornly high at over 10 percent, Hollande faces resistance from the left and trade unions to his plans to rein in public spending and ease the tax burden on business.
France irked Berlin when new Prime Minister Manuel Valls led a campaign urging the European Central Bank to weaken the euro to help revive the European economy. Germany staunchly defends the ECB’s independence.
Outspoken Economy Minister Arnaud Montebourg misses no opportunity to attack the Commission over the way it applies EU competition rules limiting government aid to business and state intervention to promote national industrial champions.
European officials say they need a strong France alongside Germany to drive Europe forward.
“The situation in France is a cause for worry, on the economic front and, following the EU elections, on the political front,” said Anne Houtman, the European Commission’s representative in Paris.
“France can be a driving force for the EU but member states are also well aware that if France sinks, there is a risk for the whole euro zone. No one has any interest in weakening it. Everybody, including Germany, wants it to get stronger.”
Even some French officials acknowledge a weakening of Paris’ involvement in the EU power game.
A presidential aide said Paris was staying out of the current battle over who should head the executive European Commission over the next five years, succeeding Jose Manuel Barroso in the most powerful EU position.
“We are not involved in that fight. We’ll leave the Germans and the British to sort that out among themselves,” the adviser said.
In the past, such key appointments were nearly always the result of Franco-German deals.
Likewise, France played a backseat role in last year’s battle over the EU’s seven-year budget plan, once it had secured its own agricultural interests, leaving Merkel and British Prime Minister David Cameron to force a reduction in spending.
Hollande responds to France’s critics by saying that the 2-trillion-euro economy is still the euro zone’s second biggest and French officials point to Paris’ role in shaping responses the euro zone crisis including rules to deal with failing banks.
“If Greece did not leave the euro zone it’s thanks to us,” a French diplomat said, hinting that Hollande had worked behind the scenes to convince Merkel of perils of a “Grexit”.
France had also been a driving force behind a European banking union despite German opposition to any mutualisation of liabilities for failing institutions, he said.
But he acknowledged: “On some issues, our economic situation does diminish our influence.”
Other EU diplomats involved in the crisis talks say while France did indeed play a role, it did not tilt the balance.
“Yes, France did push in the direction of a closer banking union,” one said. “But look at the result, Germany got it diluted.”
Another Brussels diplomat said: “France’s role in Europe has considerably weakened over the past few years ... It continues to lecture others and try to sell its economic model but it’s getting harder and harder to do so.”
That is partly because the state-driven French approach to economic development is at odds with the dominant free-market orientation of the EU, even in countries governed by the centre-left.
But a French official involved in European policy said it was also due to the president’s emollient style - a stark contrast with his conservative predecessor, Nicolas Sarkozy, who irritated many EU partners but at least ensured France got attention.
“Hollande was always weak in the European Council (summits). He doesn’t like conflict,” the official said.
“He was always accompanying compromises, not making them. He never gave the impression he would be willing to block a big decision, contrary to Merkel and Cameron.” (Editing by Mike Peacock)