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October 8, 2011

Currency Outlook: The Euro & The Swiss Franc

First of all, I think the main problem that the euro has is political.

When you put many different countries together and you have all these politicians involved, the moral hazards become enormous. Rather than allowing Greece or Ireland to default, they’re bailing them out – and by doing that, it weakens the entire system. I think it basically bakes in the cake budget deficits in all the eurozone countries. There is no incentive for any one country to act responsibly, because it will later be asked to bail out the less responsible members.

Ultimately, this could result in even more printing of euros, and more people in Europe looking for a safe haven. I think the Swiss franc has been the go-to currency for most Europeans when they want to protect themselves from a weakening euro, though in light of the recent peg I’ll discuss in a minute, they may choose precious metals or a safe- haven currency in another region.

Still, I do not believe the euro is about to fall apart. the negativity out there right now is overdone. I do believe that the EU will put a band-aid on the situation, that there will be some kind of short-term solution that the markets will embrace, the euro will rally – but, ultimately, it won’t work.

I don’t think there is enough political will there in the eurozone to do what’s right, which is to allow countries to default – allow investors and banks to lose money – so that market disciplines rein in runaway government spending. If the ECB could succeed in letting people know that the euro is not going to be printed, and that governments will default if they borrow too much, then the euro would be the dominant currency in the world.

But so far, the way they’ve been handling the problem shows me that politics is going to rise above economics, and so the euro will not be all that it could be – what it was initially envisioned to be.

Meanwhile, look at Switzerland: its taxes are relatively low, its regulations are few, and it has a long history of stability and prosperity. It was the last country to abandon the gold standard, and it might be the first country to re-embrace it.

In fact, a strong franc is very much in Switzerland’s interests, since banking and financial services are a large part of its economy. People deposit money in Switzerland because the Swiss franc is sound, not because it’s weak. Switzerland has much lower unemployment than the eurozone even though – well, I’d say because – they have a strong currency, and they have good export growth. Finally, they barely have a budget deficit at all, they have sound fiscal policy.

Unfortunately, Swiss bankers and politicians are increasingly susceptible to the Keynesian Kool-Aid. Despite the fact that their economy has soared along with their currency, the Swiss National Bank just announced that it will peg the franc to the euro, and will buy “unlimited quantities” of euros to keep the common currency valued at least 1.20 francs. This is absurd.

The Swiss declined to join the eurozone because they did not want to outsource their monetary policy. This latest move subverts that intention and exposes Swiss citizens directly to bankrupt Greeks and Portuguese. As the cost to maintain the peg increases – as I’m sure it will – I believe that the Swiss will once again re-assert their independence. -

Peter Schiff`s comments on the economy, stock markets, politics and gold. Schiff is the renowned writer of the bestseller Crash Proof: How to Profit from the Coming Economic Collapse.
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