President Nicolas Sarkozy, under pressure from a spiraling euro zone debt crisis five months before a presidential election, told France on Thursday the euro bloc needs closer and stricter coordination of national budgets to survive.

Seeking to reassure the public ahead of a Franco-German push to redraw the European Union's founding treaty, Sarkozy promised that reforming Europe would mean closer inter-governmental cooperation, not handing control to a supra-national body.

The reform of Europe is not a march towards supra-nationality, he said in a speech to some 5,000 supporters in the Mediterranean port of Toulon. The integration of Europe will go the inter-governmental way because Europe needs to make strategic political choices.

Sarkozy said he would meet German Chancellor Angela Merkel in Paris on Monday to push ahead with joint proposals for a new EU treaty to fix flaws in the Maastricht Treaty and create a true economic government for the bloc.

He said France and every other euro zone country needed to enshrine a budget-balancing golden rule in their constitutions, to force stricter fiscal discipline as the bloc strives to reform itself or get left behind.

He also said the European Central Bank must stay independent and decide for itself when to act against the risk of deflation.

Europe is no longer a choice. It is a necessity. But the crisis has revealed its weaknesses and its contradictions. Europe must be rethought, Sarkozy said.

Let us not hide it, Europe may be swept away by the crisis if it doesn't get a grip, if it doesn't change, he said, warning that a collapse of the euro would make France's debt unmanageable and wipe out people's savings.

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

2012 ELECTION LOOMS

Sarkozy, who faces a bruising fight to stay in power in an April election, is striving to paint himself as best-placed to lead France through yet more economic turmoil while laying the groundwork for proposals on tougher euro zone governance that will be discussed at an EU summit on December 9.

The centre-right leader has been pushed into a corner by the fact that France's AAA credit rating is in greater peril with every day that the euro zone debt crisis is left to fester.

Rating agencies have warned that a looming recession and the risk of having to aid banks exposed to debt-laden euro zone peripheral states is straining public finances, raising the specter of a downgrade that would be a blow to Sarkozy and could add 3 billion euros to France's annual interest costs.

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.

Sarkozy said closer European integration did not mean undermining autonomy. Europe does not mean less sovereignty, but more sovereignty because it means more capacity to act, he told the audience, flanked by the French and EU flags.

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

Merkel is due to outline her ideas on euro governance at the Bundestag on Friday, as Sarkozy discusses the matter in Paris with British Prime Minister David Cameron.

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, Finance Minister Francois Baroin said earlier.

Yet Sarkozy did not voice any support in his speech for Berlin's desire for a stronger role for the European Commission or the European Court of Justice in forcing budget discipline.

At the same time, he avoided any mention of his earlier drive for the ECB to be allowed to buy up buy bonds of troubled euro zone states en masse, saying only that the ECB had a decisive role to play and would assume its responsibilities.

Sarkozy said the way out of crisis for France was through cranking up output and managing costs, stressing that France's costly welfare sector urgent needed overhauling.

He said it was also vital to work with the rest of Europe.

He strove, however to dispel any fears of giving up French sovereignty, after concern about his plans with Merkel sparked an outcry this week among opposition Socialists. The idea is just as sensitive on the right.

Government spokeswoman Valerie Pecresse said on Wednesday that what France was seeking was greater budgetary discipline managed by governments and national parliaments.

Sarkozy, whose speech was painstakingly prepared by two top advisors, is staking his re-election on convincing voters weary of economic gloom that they should keep him in power rather than picking Hollande, who has never served in a government post.

(Writing and additional reporting by Catherine Bremer; Editing by Jon Hemming)

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