* France has run high deficits for much of past 25 years
* EU seen taking tougher stance with far-right government
* France seen moderating spending plans in EU talks

By Francesco Canepa and Leigh Thomas
       FRANKFURT/PARIS, June 26 (Reuters) - "Because it's
France" was how Jean-Claude Juncker, European Commission
president at the time, explained Brussels' decision in 2016 to
give leeway to the large, founder member of the European Union
on the bloc's budget rules.    
    That patience continued even as the EU endured a sovereign
debt crisis that almost sunk the euro and forced smaller, more
indebted nations such as Greece and Portugal to adopt swingeing
austerity measures.
    But any indulgence for French exceptionalism may come to an
end if France's snap election produces a eurosceptic, far-right
government in Paris that could strain ties with other European
capitals and test the very foundations of the euro project.
    Marine Le Pen's National Rally (RN) insists it would not
blow up the French budget. But questions persist about how it
would fund costly spending plans within the eurozone's newly
minted budget rules and whether the European Central Bank could
step in to help if financial markets turn on France.
    "If a country can just ignore the rules and be helped by the
central bank, you'll get a lot of doubts about the future value
of the euro and the future cohesion of the euro," said Holger
Schmieding, an economist at Berenberg.
    Such concerns are not on the official agenda of Thursday's
EU summit. But with the RN leading polls in the two-round vote
starting June 30, they are bound to occupy the minds of
President Emmanuel Macron's fellow leaders.
    Senior German government sources said they were dismayed by
Macron's surprise decision to call elections that could usher in
an RN-led government. One compared it to former UK premier David
Cameron's ill-fated gamble on an "in-out" Brexit referendum.
    In Italy, with an even bigger debt pile than France, a tinge
of Schadenfreude over France's misfortunes is offset by fears
that a French crisis could extend across the Alps, said
Francesco Galietti of Rome-based political risk consultant
Policy Sonar.
    Otmar Issing, the ECB's first chief economist and one of the
euro's architects, compared the debt of Italy and France to "a
sword of Damocles hanging over the monetary union", bound to
fall unless the problem is tackled.
    "You can pull the hair by which it is attached but it cannot
hold for ever," he said in an interview.
    Even Greece is not cutting France any slack, with central
bank governor Yannis Stournaras stressing that all member states
needed to respect EU rules.
    NO MORE INDULGENCE
    Polling points to the RN emerging as the largest party, with
or without a clear majority to pursue an awkward "cohabitation"
with Macron until the 2027 presidential election. 
    France's fiscal credibility is already at stake with the
International Monetary Fund questioning how it will reduce a
budget deficit running at around 5.1% this year and its credit
rating downgraded by two agencies.
    In truth, France's fiscal sins far pre-date Macron. It has
run budget deficits greater than the EU-mandated 3% for most of
the 25 years since those rules came into force.
    Brigitte Granville, economist at London's Queen Mary
University and author of "What ails France?", said its rejection
in the 1990s of German proposals for more complete political
union reflected a desire to retain sovereignty over its
finances.
    She expected the RN, which long ago dropped calls to leave a
single currency broadly accepted by French voters, to moderate
its plans just enough to please Brussels if it came to power.
    "They don't have a choice unless they want to leave the
euro," Granville said in an interview.
    RN statements to that effect have reassured investors, who
were demanding a premium of just 70 basis points to own 10-year
French bonds rather than their safer German counterparts - a far
cry from peaks of 190 points for France and nearly 560 points
for Italy during the 2011 debt crisis.
    ECB chief economist Philip Lane told Reuters the moves in
the French bond market did not appear "disorderly", meaning they
don't meet one of the conditions for the central bank's
intervention.
    
    CAUTIONARY TALES
    Observers point to cautionary tales ranging from Greece,
where a leftwing government was brought to its knees by
financial and political pressure, to Britain, where Prime
Minister Liz Truss was forced to resign after unveiling a budget
that unnerved investors.
    Most analysts emphasise the ECB has the tools to stem
contagion from a French crisis by buying bonds of other
countries that do respect the EU's fiscal framework, meaning
Paris might find itself isolated at times of need.
    "There is, of course, a possibility that Frankfurt would
intervene if the problems with France were to have some kind of
external negative effects on other countries, like Italy,"
former ECB policymaker Ewald Nowotny said.
    An EU official cited Rome as a model for Paris after Prime
Minister Giorgia Meloni toned down her anti-EU rhetoric once
elected in 2022. 
    This, along with her support for the EU's stance on
conflicts in Ukraine and Gaza, has helped Italy keep the
Commission and financial markets on-side despite repeatedly
raising its deficit forecasts.
    Jeromin Zettelmeyer, director of the Bruegel economics think
tank in Brussels, said RN's rhetoric thus far did not suggest it
was seeking a major confrontation with the Commission that could
trigger a financial crisis.
    However he said that if its officials ended up running key
ministries, they could hamper EU moves to reform energy markets,
advance the green transition and boost the bloc's
competitiveness by reforming its capital markets.
    "If the far-right gets elected that is bad news for EU
integration because they would control the government positions
involved in most dimensions of EU policy-making,' he said.
    "The question is whether that is reversible or existential."

    
 (Additional reporting by Maria Martinez and Andreas 
Rinke in Berlin, Gavin Jones in Rome, Leftheris Papadimas in
Athens, Philip Blenkinsop in Brussels, Yoruk Bahceli in London;
Mark John in London; editing by Mark John and Christina Fincher)