President Nicolas Sarkozy will endeavor to warm the nation to giving Brussels more control over national budgets on Thursday as the euro zone crisis pushes France towards recession, squeezes its banks and threatens its AAA credit rating.

Sarkozy -- who already faces a bruising fight to stay in power in an April election -- needs to paint himself as best-placed to lead France through economic turmoil while laying the groundwork for Franco-German plans for tougher euro zone governance ahead of an EU summit on December 9.

The centre-right leader is squeezed between needing to appease financial markets by agreeing a plan to tighten fiscal responsibility while wanting to avoid appearing to voters to be giving the European Commission too much say in public finances.

The president will tonight present the French proposals to prepare the ground for the European Council to modify the way governance is organized, Finance Minister Francois Baroin told a business event in Paris.

A consensus has already emerged on budgetary and fiscal convergence as well as harmonization. There is also consensus about euro zone countries' commitments to deficit-reduction targets, he said.

Sarkozy, who has narrowed his gap behind Socialist election challenger Francois Hollande in recent polls, will address some 5,000 supporters in the Mediterranean port of Toulon at 6.30 p.m. (12:30 p.m. ET) in a speech that will be broadcast live on TV.

The location is symbolic as it was in Toulon that Sarkozy railed, days after the September 2008 collapse of Lehman Brothers, against the dangers of unfettered capitalism.

The daily Le Figaro quoted a source close to Sarkozy as saying he will strive to ward off fears that France's autonomy would be eroded by giving the European Commission coercive powers to veto national budgets.

SELLING OUT?

Ratings agencies have warned that a looming recession and the risk of having to aid banks exposed to debt-laden euro zone peripheral states is putting France's AAA status under pressure.

A downgrade would be a huge blow to Sarkozy and could ramp up France's interest costs by some 3 billion euros a year.

Sarkozy recently called a truce with Merkel over his push for the European Central Bank to come to the aid of troubled euro states and has acquiesced to Germany's desire for more central governance, though proposals are not yet final.

Any appearance of undermining sovereignty would be highly risky for Sarkozy, however. It would anger the conservative wing of his centre-right UMP party as much as opposition Socialists who have already accused him of selling out to the markets.

What we want is more budgetary discipline, but a budgetary discipline met by states, with a real participation by national parliaments, government spokeswoman and budget minister Valerie Pecresse insisted on Wednesday.

Sarkozy may also promise to make a fresh push after the 2012 election to get a budget-balancing golden rule enshrined in the constitution, a move the left says it would block for now.

Pecresse told parliament on Wednesday it remained key for France, and other euro zone countries, to put fiscal rules into the law. It's with full sovereignty that we will decide that balance, a zero deficit, is our joint objective, she said.

Sarkozy hopes his Toulon speech, painstakingly prepared by two of his closest advisors, will convince voters fed up with economic gloom that they should keep him in power, rather than elect Hollande, who has never served in a government post.

Nicolas Sarkozy has understood that the euro zone crisis will be the chief issue for the election, said Jerome Sainte-Marie, head of the Isana polling institute. He is trying to fix the terms of the debate.

Merkel is expected to outline her ideas on euro governance at the Bundestag on Friday, the same day Sarkozy will discuss the matter in Paris with British Prime Minister David Cameron.

(Writing and additional reporting by Catherine Bremer; Editing by Mark Heinrich/Anna Willard)

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