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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.
To find out why this crisis is likely to be resolved, and why
similarly daunting debt problems in U.S. states like California should be
attracting even greater scrutiny, please click on the link below to see the
entire commentary which is contained in the latest online edition of my free
newsletter The Global Investor: www.europac.net/theglobalinvestor
In addition to my analysis of the Greek crisis, the issue also
contains an article about how Australia has emerged from the global economic
crisis in fairly good shape (and how investors can play that market), and a
piece by well known economic libertarian Mark Skousen who shares his thoughts
on a personal encounter he had with Fed Chairman Ben Bernanke.
The newsletter comes out six times per year. I think you'll find
its worth your time.
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