Europe’s Populists at the Gate

Investors, policy analysts, and even officials are quietly beginning to suggest that the euro crisis might be over. But, investors are missing the real risk: the collapse of public support for, or at least acquiescence to, the austerity policies required to work down heavy debts, and for governments pursuing these policies.

LONDON – Is Europe’s crisis over? Investors, policy analysts, and even officials are quietly beginning to suggest that this might be the case. The euro has strengthened by nearly 10% against the dollar since European Central Bank President Mario Draghi vowed on July 26 to do “whatever it takes” to hold the currency together.

Similarly, the Euro VIX, a popular measure of expectations of euro volatility, has fallen significantly. The cost of buying protection against fluctuations in the euro/dollar exchange rate declined last month to its lowest level in nearly five years. Borrowing costs for the Spanish and Italian governments have similarly fallen dramatically.

A consistent narrative underpins this change in market conditions. European leaders have put in place mechanisms to support Italy and Spain. As of October, the continent has an operational European Stability Mechanism to purchase new Italian and Spanish government bonds if investors go on strike.

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