Germany has taken the clear lead as the European sovereign debt crisis unfolds. This is an obvious outcome because of Germany’s relatively tight rein on government deficits and its policies that have made it Europe’s toughest competitor. Germany’s clear ascension is both good news and bad for Europe, and a clear warning to the United States.

The most recent sign of the European shift in power was Germany’s unilateral decision to ban “naked short selling”, which is a form of speculation whereby one bets that an asset price would go down (short selling), without first borrowing the stock (the naked part). This decision dismayed other European leaders because they were given no advance warning, let alone an opportunity to discuss the policy. Put plainly, Germany broke the standing rules of the cozy little club that is Europe.

It must further dismay other European leaders because this decision may signal Germany’s intention to exercise its financial muscle and force some painful rewriting of other club rules. Germany has already hinted at this through references that greater central control (read: German control) needs to be exercised over fiscal policies of misbehaving countries.

The German decision on naked short-selling also dismayed the markets, driving down equity values and the Euro. If the problem is that speculators are driving the Euro downward inappropriately, then a powerful effort to stymy the speculators should have led to a strong upward move in the Euro. Message to Berlin: This is what a policy backfire looks like.

Markets were dismayed in part because Chancellor Merkel’s government has demonstrated anew that it understands little of finance or economics. This was underscored further by remarks by Wolfgang Schauble, Germany’s finance minister, who said, “I am convinced the markets are really out of control.”

Nein, Herr Schauble, you have it exactly backwards. The markets, after a long period of trust and benign neglect of European policies, are now firmly in control.

The message for the United States could not be plainer. First and foremost, the markets will tolerate persistent and extraordinary deficit spending only so long, and when they lose patience the shift can be sudden, surprising, and painful. The United States appears likely to experience this first hand. Under President Obama’s budget policies, the United States is building a bridge of trillion dollar deficits through the decade on route to our long-standing financial debacle known as entitlements. It is fantasy to believe the markets would tolerate this.

Second, when the shift occurs, the markets then are firmly in control, and in particular, any nations that are significant net suppliers of global saving gain an exceptional voice over domestic policies. One only gains full control over the nation’s sovereignty when one gains full control over the nation’s finances.