It's All Greek to Me

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Recently by Peter Schiff: Fear Takes the Wheel

If the global economy were a three-ring circus, then the center ring attraction would be the currency and debt battle quietly and slowly building between the United States and China. But for the past month the world’s attention has been distracted by a much more entertaining sideshow in which European unity, and the ongoing viability of the euro, is being tested by the Greek debt crisis.

I believe the short-term problems in Europe are being overblown and the potential demise of the euro highly exaggerated. For those who can connect the dots however, the Greek drama throws some much-needed light on the far more daunting problems unfolding within our own fiscal house.

The scenario that is eliciting the greatest fears is that resentment from the more solvent EU members (Germany, France, et al.) will prevent a bailout. If the Greek government then fails to adopt austerity measures that will bring it back in line with EU debt requirements, an expulsion, or withdrawal, from the Union becomes a possibility. This could set off a domino effect that will bring down larger European political or monetary union. On the other hand, if Greece does receive a bailout, a moral hazard will be created that will encourage other indebted countries (Portugal, Spain, etc.) to press for equal benefits.

Both scenarios would destroy confidence in the euro, remove the biggest rival of the U.S. dollar, and give a shot in the arm to the dollar’s global status.

However, there is a third more likely alternative that few are considering. My gut is that Greek politicians will find the prospect of being forced out of the union and re-creating their own currency, formerly called the drachma, even more unpalatable then swallowing the bitter pill of fiscal austerity.

Even if defying the EU might seem like good politics now for Greek leaders, the risks associated with economic independence could be so daunting that politicians will refuse to roll the dice.

Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse.

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