Analysis: Core problem for Europe as France, Germany drift apart

By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters)- Even as the euro zone periphery starts to spy some glimmers of hope, concern is mounting that Germany is drifting apart from other countries at the core of the single currency bloc, notably France.

Economically, the worry is that insistence on fiscal austerity by an out-performing Germany will delay an upturn in France, which has been steadily losing competitiveness to its larger neighbor.

Politically, the risk is that already uneasy relations between French President Francois Hollande and German Chancellor Angela Merkel could come under further strain when the euro zone needs strong, cohesive leadership to create a new institutional framework for the euro.

Philippe Waechter, chief economist at Natixis Asset Management in Paris, said signs of a solid recovery in Germany's economy were bolstering Merkel's position on economic policy going into September's general election.

Hollande, by contrast, was forced to acknowledge on Tuesday that growth would fall short of his government's 0.8 percent forecast. His government has already admitted it will miss its deficit target this year.

"The issue is how the balance of power evolves between Francois Hollande and Angela Merkel, knowing that France and Germany are extremely important in the political construction of the euro zone," Waechter said.

IMBALANCE OF POWER

Paris is more in tune with Italy and Spain than with Germany in wanting to put growth before deficit reduction and structural reform.