The crisis in the EU has moved through several stages. In the initial stage, it was a crisis of small peripheral economies: Ireland, Portugal, Greece. The question then was whether the crisis would spread from the small fry to Spain. If it was a small fry problem, Europe could solve it with the back of its hand; if Spain needed a bailout, Europe would have to do some heavy lifting.Spain fell, and the Europeans realized they had some work to do. They huffed and puffed and came up with a much larger bailout fund: the European Financial Stability Fund, a $600 billion plus war chest that could accommodate Spain as well as the small fry.The spotlight then shifted to Italy, where despite relatively limited annual deficits, a huge national debt (120 percent of GDP) made Europe’s third biggest economy vulnerable to changes in market sentiment. The hope was that Italy could produce a credible reform and austerity program before it, too, needed help. The fear was that an Italian bailout would explode the EFSF and create a mess so big that the remaining healthy economies in Europe couldn’t clean it up.Now Italy is down, though not quite out. A serious austerity plan combined with reforms that could produce economic growth (Italy hasn’t grown in ten years) might just be enough to get Italy out of the red zone, but the chances are not good.With Italy surviving at the moment thanks only to the ECB’s (European Central Bank) willingness to buy its bonds, the spotlight has now moved to France. Investors and observers are beginning to wonder whether France, the second biggest economy in Europe, could also be vulnerable to a debt shock and a bond meltdown. The difference between the interest rate on French bonds and the interest that Germany has to pay has been widening, partly because investors worry that French banks are so exposed to the mess in Italy that the French government will have to bail them out at a very high cost. That in turn would blow a hole in the French government’s shaky financial position.Europe could handle the small fry without much sweat. Spain was manageable but hard. Italy pushes Europe to the absolute limit; if France goes, it is game over.Right now, Europe is in one of its recurring fits of denial. It is telling itself that new governments in Greece, Italy and (after the upcoming elections) Spain will pass some nice austerity legislation, introduce some helpful reforms, and all will be well. But it is more likely than not that these hopes, like all the false hopes and will of the wisps with which Europeans have beguiled themselves throughout this whole crisis, will fail.If that happens, the next line of defense is the ECB; since the ECB can print euros (like the Fed can print dollars), if the ECB becomes the buyer of last resort for indefinite quantities of Italian bonds, the system could technically withstand a true Italian meltdown.But even with all out ECB support, a French meltdown would test Europe to the limit. Germany and the remaining handful of strong European economies would have to be willing to absorb huge losses and costs. It is not clear that voters would put up with these costs or the inflation likely to result from the mass euro-printing activities of the ECB.The battle of France is the battle for Europe and the battle for Europe is the battle for the world.Stay tuned.