PARIS ― As France’s presidential election looms, the country is approaching a breaking point. For three decades, under both the right and the left, the country has pursued the same incompatible, if not contradictory, goals. With the sovereign-debt crisis pushing French banks ― and thus the French economy ― to the wall, something will have to give, and soon.

When the crunch comes ― almost certainly in the year or two following the election ― it will cause radical, wrenching change, perhaps even more far-reaching than Charles de Gaulle’s coup d’etat, which led to the establishment of the Fifth Republic in 1958.

Most French politicians and bureaucrats call such notions scaremongering. After all, aren’t key indicators like debt ratios or budget-deficit trends worse in the United States and Britain? Indeed, France’s predicament might seem comparable with the “Anglo Saxons,” were it not for the French political class’s beloved baby, the euro.

While the euro has not caused France’s economic problems, its politicians’ commitment to the single currency represents an insurmountable barrier to solving them. The basic problem is that the country’s super-generous welfare state (public spending amounts to about 57 percent of GDP in 2010, compared to 51 percent in the United Kingdom and 48 percent in Germany) stifles the growth needed for the euro to remain viable.

The most serious structural flaws concern high payroll taxes and labor-market regulation, which make it difficult ― or at least prohibitively expensive ― for firms to reduce their workforce when business conditions worsen. The OECD reports that in 2010, France’s “tax wedge” (income taxes plus employee and employer social-security contributions minus cash transfers as a percentage of total labor costs) was at least 13 percentage points above the OECD average at every level of household income.

The result has been elevated unit labor costs relative to France’s peer group (especially Germany) and stubbornly high unemployment. During Valery Giscard d’Estaing’s presidency in the 1970’s, unemployment rose every year, reaching 6.3 percent by 1980. Francois Mitterrand promised rapid growth and lower unemployment when he came to power in 1981, but presided over an economic slowdown and rising unemployment. By 1997, unemployment reached 11.4 percent, and dipped below 8 percent in only one year since then (2008).

High unit labor costs and unemployment rates are responsible, in turn, for reducing the trend rate of economic growth, mainly owing to underutilized labor, while the combination of lackluster growth and an ever-mounting welfare burden has resulted in chronic budget deficits. The last surplus was in 1974.

The current election campaign is accordingly centered on France’s fiscal position. Everyone agrees that deficit reduction is required, while differing on how to go about it. Sarkozy’s proposed cure is to boost growth by reducing the tax burden on employers, while simultaneously hiking the rate of value-added tax. His main opponent, Socialist leader Franois Hollande, would impose higher taxes mainly on the wealthy and the financial sector, but also on big business.

With the only effective solutions ― full-blown eurozone political union, or abandoning the euro ― ruled out, muddling through is all that is left. Another name for this approach is “transfer union,” which implies relentless economic austerity and declining living standards, because strong countries ― first and foremost, Germany ― are determined to limit their liability for bailing out deficit countries by making all transfers conditional on tough budget retrenchment.

At the same time, financial markets are forcing fiscal retrenchment on governments, as will the planned new fiscal treaty (on which Germany, among others, insisted). Demand is therefore being drained out of the eurozone economies, with stronger external demand, stemming from the euro’s depreciation against other major currencies, unable to offset the effect on growth.

The French government expects budget revenues to match all spending except debt service by 2014. But that forecast assumes continued growth, whereas France is slipping into recession. So the budget deficit will persist, and more retrenchment will be required.

Will the public grin and bear it, or demand a radical change of direction? In the latter scenario, the change would be delivered either by a part of the mainstream political class that breaks ranks, or through a successful challenge by a political outsider, whether National Front leader Marine Le Pen on the right or Jean-Luc Melenchon’s Left Front. Both parties are campaigning on an anti-euro, protectionist platform.

Sarkozy has adopted a statesmanlike pose, as befits the incumbent, warning voters of the hard grind to come, such as the need to work longer hours for lower hourly pay. But selling to the French public painful structural change as the price to be paid for “Europe” no longer works.

Hollande’s program, meanwhile, implies that pain can be avoided altogether by loosening European constraints. He has indicated that, if elected, he would renegotiate the fiscal treaty and seek to alter the statutes of the European Central Bank ― perhaps as an early sign of willingness to break with European orthodoxy. He is also promising to emulate his predecessors by bringing Germany around to the French point of view ― that is, use German fiscal transfers. That way, France could hold onto its European project at a lower medium-term cost to domestic living standards.

This is the sort of trick that Hollande’s mentor, Mitterrand, was able to pull off. But that was possible not because of Mitterrand’s superior wiles, but rather because France had a stronger position vis vis Germany than it does today.

France’s response to the tension between preserving the European project (equated with the single currency) and avoiding a chronically depressed economy will be to put off the day of reckoning for as long as possible. This dead-end strategy will feature vain attempts to game Germany and desperate economic expedients, such as the essentially coercive capture of domestic savings to finance government debt. But the day of reckoning will come, and France’s ruling establishment will be judged harshly when it does.

By Brigitte Granville

Brigitte Granville is professor of international economics and economic policy at Queen Mary, University of London, and the author of the forthcoming book “Remembering Inflation,” Princeton University Press. ― Ed.

(Project Syndicate)