Gideon Rachman is sounding the warning bell on FT over the fragility of the Euro recovery plan. Recalling the European Central Bank President’s now-famous statement of support, Rachman warns that the crisis is still there, just buried beneath a surface of nice words and hopeful thoughts.

Is a Euro haircut on the horizon?

Is a Euro haircut still on the horizon?

Notes Rachman:

“Whatever it takes.” Mario Draghi’s declaration that he would save the euro could well go down as the most effective three-word statement by a Roman since Julius Caesar’s veni, vidi, vici.

The European Central Bank president’s statement, followed up with a portentous and vaguely threatening – “and believe me it will be enough” – was made in July 2012. Almost two years later, Mr Draghi’s intervention is widely regarded as the turning point in the euro crisis. Investors who were running screaming from the eurozone in the summer of 2012 are now rushing back in.

But whatever the thundering herd of investors may think, it is too soon to declare that Mr Draghi has won the war for the euro. The eurozone still faces deep underlying economic and political problems that are beyond the control of the president of the ECB and his colleagues.

What Mr Draghi has managed to do is to buy the euro some time. The borrowing costs of Spain, Italy and even Greece have fallen sharply – easing the pressure on their economies and government finances. But the underlying economic situation in many eurozone countries is still grim. And the political consequences of prolonged slumps are only just beginning to emerge.

I write often about economic risk costs and how they are present but not fully accounted. For anyone who thinks the cost of risk of doing business in Europe  is back to normal, Rachman’s warning is a good one to consider carefully. Contrasted with the increasingly good economic news coming out of North America, the concerns over Europe get even clearer.

 

Read more:

http://www.ft.com/intl/cms/s/0/03b1e368-be3d-11e3-b44a-00144feabdc0.html#axzz2yCW9px4p

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Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

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