By John Irish
PARIS, Sept 3 (Reuters) - France's government wants to pushthrough an unpopular but crucial pension reform by October tohelp bring the country's ballooning public debt under control.
President Nicolas Sarkozy is determined to reduce the fiscaldeficit and restore credibility before chairing meetings nextyear of the Group of 20 and the Group of 8 and ahead of the 2012presidential election.
His approval rating is at a record low after a ministerbecame embroiled in scandals over alleged illegal campaigndonations and abuses of taxpayers' money. He has said he willreshuffle the cabinet in October.
Following is a summary of the main risks for France:
PENSION REFORM OR BUST
Sarkozy has set a deadline of October for the adoption of alandmark pension reform, raising the retirement age to 62 from60 in 2018 and making people work longer for a full pension.
The reform is aimed at wiping out the chronic deficit of thepay-as-you-go pension system, which would otherwise run upannual deficits of 100 billion euros ($134.2 billion) by 2050.
Most polls suggest voters accept that the system needs to beoverhauled but the trade unions and the opposition Socialistshave vowed to fight a reform they regard as unjust.
The government has indicated it will make concessions onsecondary issues and spend the next weeks negotiating with allparties concerned, but has vowed to retain the core elements.
The unions torpedoed a previous attempt to reform pensionsin 1995, when strikes paralysed France after then Prime MinisterAlain Juppe tried to overhaul the system. He was forced toretreat and soon afterwards lost power.
A retreat now could be disastrous for Sarkozy's 2012re-election chances and worry investors about France's resolveto cut its deficit, so he will do everything possible to clingto the main plank of the reform. He knows big concessions mightcost France its AAA debt rating and alarm the financial markets.
What to watch:
-- Unions have called for strikes and demonstrations onSept. 7, the day the bill goes to debate in the lower house.Investors will want to see how big the protests are to have anidea whether the government will back down.
-- If there is a big outcry, dissident Gaullist supportersof ex-Prime Minister Dominique de Villepin and members of theNew Centre party, a junior partner in the government, couldrebel and demand changes to the bill. Investors will be lookingto see how the government calms tension.
SCANDALS, SLEAZE AND A RESHUFFLE
A nagging political scandal involving Labour Minister EricWoerth, who is spearheading the pension reform, could alsoweaken the government's resolve.
Alleged illegal political donations and tax evasion byFrance's richest woman Liliane Bettencourt have dogged Sarkozy'sgovernment since June.
The sleaze surrounding the affair may well reinforce publicwillingness to fight the pension reform after the summer break.Most commentators say Sarkozy cannot afford to drop his ministerduring the reform programme, potentially delaying it.
Two ministers were forced to resign over expenses scandals,seen as an effort to keep Woerth in his post.
Even if further evidence were to emerge of politicalmeddling in the Bettencourt affair, there is little chanceSarkozy would be forced to resign.
The president's popularity is at a record low and hiscentre-right UMP party lost an ultra-safe parliamentary seat ina by-election earlier in July.
What to watch:
-- Sarkozy is counting on his presidency of the Group of 20major economies for 12 months from November to swathe him in amantle of global leadership, reminding voters of his energeticaction at the peak of the financial crisis in 2008.
-- He plans to reshuffle the government in October, afterthe pension reform is passed, to open a new phase before the2012 election. He is likely to jettison members lured from theleft and bring in trusted conservatives to see him through.Investors will want to see whether the big hitters brought inwill bring stability and experience to the cabinet.
-- The Bettencourt saga could conceivably raise the urgencyof a reshuffle if prosecutors were to find any wrongdoing by thelabour minister but this is unlikely given that legal inquitiestake considerable time.
MEETING BUDGET COMMITMENTS
The government is trying to bring public finances undercontrol and has announced 40 billion euros in cuts in civilservice jobs and lower social spending in the 2011 budget.
Paris has pledged to bring the deficit down to 6 percent ofgross domestic product by end 2011, from an expected 8 percentthis year, and to get below the EU target of 3 percent in 2013.
The budget is based on an ambitious GDP growth forecast of2.5 percent in 2011. Slower growth could force further cuts intax breaks and curb spending to meet budget commitments.
What to watch:
-- With presidential and parliamentary elections due inspring 2012, Sarkozy may be reluctant to tighten the screw toomuch in 2011 or early 2012, leaving a big shortfall to cutquickly thereafter. Any sign that France cannot meets itsdeficit targets will worry investors. When the budget ministersaid in June keeping the country's AAA rating would be astretch, the cost of protecting government debt against defaultrose to near record highs.
-- The budget will be presented in late September. Thegovernment in August cut its 2011 growth forecast to 2.0 percentfrom 2.5 percent before that, obliging it to take more deficitreduction measures, including moves to boost tax income throughelimination of various tax breaks. Sarkozy promised not to raisetax when elected but analysts say voters may at some stage seethe end of tax breaks as tax rises in disguise.
Sarkozy will monitor a possible return of violence inhigh-rise suburbs of major cities. Riots erupted in Grenoble inmid-July after police shot an alleged armed robber.
Following the riots, Sarkozy proposed tough measures tofight crime, delinquency and illegal immigration, echoing thehardline stance that helped him win the 2007 election, vowing toflush out delinquent "riff-raff" with a power hose.
Since 2007 he has failed to reduce violent crime despitetougher policing following widespread riots in 2005. Somesuburban neighbourhoods remain stricken by high youthunemployment, poor public services, drug trafficking and a risein gun crime.
Howver, while opinion polls suggest his security stand hasmajority voter support, it appears to have backfired in anothersense after he also ordered the repatriation of thousands ofRoma immigrants to eastern Europe. The policy has not only drawnfire from the left-wing opposition, members of the Catholicchurch and rights groups including the United Nations humanrights body but also caused unease among his ministers.
What to watch:
-- Were the Grenoble riots a one-off or the start of a newbout of violence? Sarkozy said in 2008 he wanted a "MarshallPlan" for the suburbs and said in July he would wage war againstcriminals. With tough spending cuts ahead, action may provedifficult.
-- While polls sugggest the Roma reptriation is supported byconservative voters, increasing dissent within the cabinet andhis own party could weaken the government's tough stance.
France's priority is to create an "economic government" forthe euro zone, with regular summits of the 16 leaders and adedicated secretariat, to coordinate economic policy and focuson rebalancing the European economy and boosting growth.
The economic crisis, which threatened debt restructuring,panic in markets and knock-on problems in France's bankinginfrastructure, forced Sarkozy into applying austerity in allbut name and, as a result, cooperating more closely withGermany.
The two sides have agreed to tighten policy coordination andimprove budget discipline, and are on the same page when itcomes to sanctions against budget offenders and financialregulation.
What to watch:
-- Investors will be looking for cooperation and strongunited messages from Sarkozy and German Chancellor AngelaMerkel. Any sign of an about-turn from either will concerninvestors. (Editing by Ralph Boulton)