Has Draghi really saved the euro? The currency rests on two questionable premises.

• Author: Lachman, Desmond

On the second anniversary of ECB President Mario Draghi's famous "the ECB will do whatever it takes to save the euro" pronouncement, it is understandable that European policymakers appear to have convinced themselves that the worst of the European sovereign debt crisis is behind us. After all, European sovereign bond yields have now returned to their pre-crisis lows, European equity markets are buoyant, and the earlier market talk of an existential threat to the euro has long since totally receded.

Sadly, European policymakers' present complacency about the eurozone's economic future would seem to be dangerously misplaced. This is especially the case in view of the present fragile state of the European economic recovery, the rising risk of deflation, and the increased signs of political fragmentation. In that respect, European policymakers would seem to be ill-advised to be glossing over Europe's still very shaky economic and political fundamentals in general and its unsustainably high private and public sector debt levels in particular. Worse yet, they would seem to be making a gross policy misjudgment by allowing complacency to sap their willingness to persevere with those structural economic and institutional reforms that might place the euro on a more secure footing.

There can be little doubt that Draghi's July 2012 "do whatever it takes" statement did succeed in pulling the eurozone back from the brink. It did so by convincing market participants that in extremis the ECB would not allow a eurozone member country to fail and that the ECB was indeed committed to buying as many of a member country's government bonds as might be needed in order to keep that country in the euro. As a result, despite the fact that the ECB has yet to buy a single European bond under its Outright Monetary Transactions program and despite an unfavorable German Constitutional Court pronouncement against that program, the markets have come to be convinced about a "Draghi put" on the eurozone sovereign debt market that will provide an effective floor under that market.

European policymakers mistakenly ascribe most of the improvement in European market sentiment over the past two years to the ECB's actions and to their own policy efforts. They do so in seeming disregard of the markedly changed global liquidity environment. In that respect, they choose to gloss over the major assist that the ECB has received from both the Federal Reserve and the Bank of Japan. For...