The Next Debt Crisis Could Come from Paris

President Nicolas Sarkozy has been a key player in shaping Europe’s response to the debt crisis that has so far infected Greece, Ireland, and Portugal. Yet the most important thing he can do to shore up the euro may be to deal with the mounting economic problems in his own country. “On our current trajectory, we’re driving straight into the wall,” says Jacques Mistral, an economist at the Paris-based IFRI think tank and member of the French prime minister’s council of economic advisers. “There’s no room to maneuver.’’

Europe’s second-largest economy and contributor to the region’s bailout funds is among the euro zone’s laggards in cutting its own deficits. Though a traditionally strong exporter, it’s headed for a record trade deficit this year. France still has a AAA credit rating, and its national debt of €1.6 trillion ($2.3 trillion) is roughly on par with Germany’s. Yet at 7 percent of gross domestic product, France’s 2010 budget deficit was higher than Italy’s and double Germany’s in relative terms. Excluding those now receiving bailout funds, in the euro zone only Spain and Slovakia did worse.