Is Europe’s crisis over? Investors, policy analysts, and even officialsare quietly beginning to suggest that this might be the case. The euro hasstrengthened by nearly 10% against the dollar since European Central Bank PresidentMario Draghi vowed on July 26to do “whatever it takes” to hold the currencytogether.

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

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

In parallel, the ECB has announced an “outright monetary transactions”(OMT) program to purchase bonds already trading on the secondary market. Attheir most recent summit, European Union leaders reiterated their commitment tofinalize the design of a single supervisory mechanism by January 1, 2013, andto activate it by the end of next year.

These steps, it is argued, have taken both sovereign-default risk and abanking crisis off the table. With the ESM and ECB capping interest rates ongovernment bonds, countries will have as much time as they need – and they willneed plenty – to reduce their debt burdens to manageable levels. And, with asingle supervisor in place, the ESM will be permitted to inject capitaldirectly into troubled banks. The new banking union can then be extended toinclude a common resolution fund to enable the orderly dissolutionof insolvent institutions.

To be sure, there are some gaps in this narrative. The ESM has limitedfirepower, and, along with the ECB, will buy only the bonds of governments thatask, something that proud leaders are reluctant to do. The end-2013 deadlinefor implementation of the banking union is a long way off. Even if there isagreement on the need for a common resolution fund – which is not clear – thereis no agreement on how to pay for it.

Nevertheless, the markets evidently regard this as a comforting bedtimestory – all the more so now that European leaders have averredthat Greece will not be pushed out of the eurozone. Officials recognize thatcutting off EU support and compelling the ECB to stop providing credit to theBank of Greece would be Europe’s Lehman Brothers moment. The consequences couldbe catastrophic, not just for Greece, but alsofor Portugal, Spain, Italy, and who knows whom else.

In their October 18 communiqué, eurozoneleaders stated in no uncertain terms that they are not prepared to go there.Given Europe’s facility at creative accounting, some way will be found to keepGreece on life support.

So, is the crisis really over? In focusing on summit declarations andpromises of far-reaching reforms of EUinstitutions, investors are missing the real risk: thecollapse of public support for, or at least public acquiescence to, the austeritypolicies required to work down heavy debt burdens – and for thegovernments pursuing these policies. Mass anti-austerity protests are onewarning sign. Another is growing popular support for neo-Nazi movements likeGolden Dawn, now the third-largest political party in Greece.

The rise to power of a “rejectionist” European government – that is, onethat unilaterally rejects the policy status quo – would immediately bringthe crisis to a head. A Greek government that summarily rejected conditions setby the EU and the International Monetary Fund would immediately be cut off bythe ECB and forced to exit the euro. A Spanish government that did likewise would lose all prospect of support from theECB’s OMT program, and the markets would quickly pounce.

Some will object that dire warnings ofpolitical reaction are overdrawn. So far, nocountry has voted into power a rejectionistadministration. Even in Greece, where conditions are the worst, Golden Dawn isstill a minority party. The answer to these critics is, unfortunately, “justwait.” It is worth recalling that nearly four years passed from the onset of the Great Depression in Germany to the Nazis’accession to power.

Europe needs a growth strategy to put this political genie back in the bottle. It needs policies that holdout the promise of lower unemployment and better times. The continuing absenceof such policies is the gravest threat to the euro. Unless that changes,markets will wake up to that risk – perhaps witha jolt – sooner or later.