If the global economy were a three ring circus, the center ring attraction would be the currency and debt battle quietly building between the U.S. and China. But for the past month the world's attention has been distracted by a much more entertaining sideshow wherein 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. The Greek drama throws some much-needed light on the more daunting problems unfolding within our own fiscal house.
Eliciting the greatest fears is that the 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 USD, and give a shot in the arm to the dollar's global status.
However, there is a third more likely alternative. My gut is that Greek politicians will find the prospect of being forced out of the union and recreating their own currency, formerly the drachma, even more unpalatable than swallowing the bitter pill of fiscal austerity.
Even if defying the EU might seem like good politics for Greek leaders, the risks associated with economic independence could be so daunting politicians will refuse to roll the dice.
It's All Greek to Me
Source: GoldSeek, Peter Schiff (2/24/10)
"I believe the short-term problems in Europe are being overblown"