In the 1986 film Heartbreak Ridge, protagonist Clint Eastwood is a United States gunnery sergeant in charge of making sure that he has carried out his duties before he retires. And to do so he submits some young Marine recruits to brutal discipline. The Sergeant of Europe, German chancellor Angela Merkel, might presume that her country's economy is more productive, sells more and loans more money than other nations in the EU. So much so that everyone else may have to get into shape and germanize if they want to stay in the race, because the ECB will not give any help through fiscal stimulus.
Liquidity flowing to the banks will help them stay afloat, but they are having a hard time figuring out how to make this money flow. That is one conclusion to come out of the European summit.
The periphery will have to go through blood, sweat and tears. But the markets do not like pain, so they have started to retreat. Yesterday the euro dropped 1.3 on the dollar and Italy was forced to pay 6.47% for 5-year bonds. Further, the majority of EU member countries not on the euro expressed their doubts about the legality of what they consider to be a blank check for Merkel. In France, election favorite Hollande announced that he would revise the agreement.
In Ireland, the opposition asked for a referendum. And in Greece the proposal for a 450 euro minimum wage was rejected. Are we going back to the starting point? At this point economies should respond by devaluing their money supply, through fiscal adjustment or printing bills. But Merkel has closed both paths. That condemns us to working more and impoverishing ourselves to the point that we are cheap and competitive. Could charging everyone 500 euros pay for all the debt? The vicious circle proposed by Sergeant Merkel is a most dangerous game.
