diff --git a/IPython/core/application.py b/IPython/core/application.py
index b0f085f..46c00d4 100644
--- a/IPython/core/application.py
+++ b/IPython/core/application.py
@@ -350,13 +350,13 @@ class Application(object):
         # our shipped copies of builtin profiles even if they don't have them
         # in their local ipython directory.
         prof_dir = os.path.join(get_ipython_package_dir(), 'config', 'profile')
-        self.config_file_paths = (os.getcwd(), self.ipython_dir, prof_dir)
+        self.config_file_paths = (os.getcwdu(), self.ipython_dir, prof_dir)
 
     def pre_load_file_config(self):
         """Do actions before the config file is loaded."""
         pass
 
-    def load_file_config(self):
+    def load_file_config(self, suppress_errors=True):
         """Load the config file.
         
         This tries to load the config file from disk.  If successful, the
@@ -377,6 +377,8 @@ class Application(object):
                                self.config_file_name, exc_info=True)
             self.file_config = Config()
         except:
+            if not suppress_errors:     # For testing purposes
+                raise
             self.log.warn("Error loading config file: %s" %
                           self.config_file_name, exc_info=True)
             self.file_config = Config()
diff --git a/IPython/core/tests/test_application.py b/IPython/core/tests/test_application.py
new file mode 100644
index 0000000..21da4d6
--- /dev/null
+++ b/IPython/core/tests/test_application.py
@@ -0,0 +1,33 @@
+"""Tests for IPython.core.application"""
+
+import os
+import tempfile
+
+from IPython.core.application import Application
+
+def test_unicode_cwd():
+    """Check that IPython can start with unicode characters in the path."""
+    wd = tempfile.mkdtemp(suffix="€")
+    
+    old_wd = os.getcwdu()
+    os.chdir(wd)
+    #raise Exception(repr(os.getcwd()))
+    try:
+        app = Application()
+        # The lines below are copied from Application.initialize()
+        app.create_default_config()
+        app.log_default_config()
+        app.set_default_config_log_level()
+
+        # Find resources needed for filesystem access, using information from
+        # the above two
+        app.find_ipython_dir()
+        app.find_resources()
+        app.find_config_file_name()
+        app.find_config_file_paths()
+
+        # File-based config
+        app.pre_load_file_config()
+        app.load_file_config(suppress_errors=False)
+    finally:
+        os.chdir(old_wd)
diff --git a/IPython/core/tests/test_magic.py b/IPython/core/tests/test_magic.py
index 3444600..25ed013 100644
--- a/IPython/core/tests/test_magic.py
+++ b/IPython/core/tests/test_magic.py
@@ -293,9 +293,9 @@ def test_parse_options():
     
 def test_dirops():
     """Test various directory handling operations."""
-    curpath = lambda :os.path.splitdrive(os.getcwd())[1].replace('\\','/')
+    curpath = lambda :os.path.splitdrive(os.getcwdu())[1].replace('\\','/')
 
-    startdir = os.getcwd()
+    startdir = os.getcwdu()
     ipdir = _ip.ipython_dir
     try:
         _ip.magic('cd "%s"' % ipdir)