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Stimulus Is the Worst Option for Euro Zone: Schiff


Even as a meeting of the leaders of all 27 members of the European Union concluded without any consensus, data released Thursday raised grave concerns. Germany now looks to be getting dragged into a recession with most of the other member nations.

Central to the debate in the EU is what to do about Greece. Greek voters are in the midst of a violent revolt against the EU's policy of "austerity." The choice for other member nations is whether to give Greece the funds it needs to stimulate its economy or to cut Greece loose. Austerity means Greece will leave the Union, either by choice or force. Stimulating involves "printing money," most likely via the proposed creation of Eurobonds.

Peter Schiff of Euro Pacific Capital says the worst case scenario is if the EU chooses stimulus, which he thinks is highly unlikely to happen. "Either Greece is going to leave the euro zone, or it's going to have to accept austerity as a price of remaining a member," he says. "There's no way that Germany is just going to cave and support the Greek welfare state."

Bailing out the Greeks would be expensive, but the real problem would come from the moral hazard of such a bailout. Once Greece is bailed out, there's absolutely no reason to think Spain, Italy, and other troubled nations wouldn't expect the same treatment. Germany's concern is that the nation would eventually be the one stuck with the tab. It's a "rotten deal—they're not going to sign off on it."

We'll see. German Chancellor Angela Merkel is losing support in her fight to keep austerity in place. Internationally, she lost France as an ally when Sarkozy was replaced by Hollande. Domestically, German voters are turning against her party in key German state elections. She can't hold out forever.

Until a decision is made to either start selling Eurobonds or drum Greece out of the EU, U.S. markets will likely remain in limbo, if not begin to head definitively lower. It's simply too hard to build long positions all day only to walk in the next morning and get knee-capped by something Europe did.

It's time for Europe to either print or get off the pot by showing Greece the door. Schiff hopes it won't happen, but the odds are tilting in favor of cranking up the printing presses. In other words, brace yourselves for the worst.