Here's Why Greece Leaving The EU Could Cause Another Depression

Greece is

and now there is speculation that we could see Greece leave the Eurozone. There were two headlines this morning that touched on Greece leaving, and what would happen. German Chancellor Angela Merkel was apprised of Greece potentially leaving the Eurozone. Essentially, it would be a disaster of epic proportions, but perhaps maybe we need that for the longer-term health of the global economy. The first Dow Jones headline said that a Greek exit could trigger a domino effect, and lead to other countries, such as Ireland, Portugal and other weakened countries leaving the E.U. The yield on Greek two-year debt is 53.20% (as of this morning), which is obviously unsustainable. Greece has been bailed out twice already, and may need a third time, especially if Merkel is intent on keeping the Euro currency. Merkel is saying that if Greece fails, it would be nothing short of catastrophic. EU president Herman Van Rompuy said the same thing

Van Rompuy said that Greece will not leave the E.U., and would go so far as serving a second term to help Europe overcome its crisis. ''This would create more problems than solutions,'' Van Rompuy said in terms of Greece leaving. In an interview with VRT Flemish radio, Van Rompuy said, ''The euro has never been stronger than it is today. The first thing to do is to put in order the affairs of countries that implemented bad policies in the past and face problems today. Financial markets see that there are still problems in the execution of (budget) plans in Greece and Italy. Europe must increase pressure on those countries in order for them to implement the plans they put together." Perhaps we do need Greece, and the rest of the PIIGS (Portugal, Italy, Ireland, Spain, Greece) to leave the Eurozone, and create a North and South Euro. We have already seen Merkel lose key elections in Germany, and French President Nicolas Sarkozy is not exactly having a great time in France either, with some of the lowest approval ratings of his term. If there was a split, the PIIGS would also certainly crash and burn, but it would eventually allow for the dust to settle, and the problems to be addressed. Europe needs to stop bailing out the countries that have no ability to pay their bills when the bailouts are based on austerity measures. If a country's workforce is being laid off, and it is in sharply in debt, it will not work. These countries need to default, with banks such as Deutsche Bank

and others taking haircuts on the government debt they own. It will be incredibly painful, with perhaps millions of jobs lost around the globe, but it is something that needs to happen. This would take years to play out, and could cause another depression. We need to get the waste out of the system, and hit the restart button. Otherwise, the problem will never get resolved. It was not fixed in 2010, it has not been fixed in 2011, and every other year will be just like the prior one until it is solved, painfully or otherwise. With

and the Euro Financial Stability Fund at just a few hundred billion euros, there is no way all five countries can be saved. Either the EFSF needs to be significantly expanded (to the tune of perhaps $2 trillion or more), or we have an eventual default. The problem with expanding the EFSF? The countries are just bailing themselves out. There could be a "European TARP," with the countries re-capitalizing the banks, but there has been little to no movement on that front. Perhaps the next G7 meeting will have more clarity on that issue. There appears to be little to no appetite from Germany or France for bailing out the weaker countries, and if something is not done sooner rather than later, we could see the death of the Eurozone as know it today. Merkel, Sarkozy and others may not want Greece to leave, but they may have no choice. The markets may force their hands, and if that happens, it could get even uglier than it already is.

Traders who believe that the Eurzone is on the verge of collapsing might want to consider the following trades:

Traders who believe that something gets done finally about the PIIGS without them leaving the E.U. may consider alternate positions:

Bullish: for gold, as it would probably mean the end of the Euro Bearish: for the Euro, as the EU appears to be coming to an end