For all the frustration and anger surrounding the recent negotiations between Greece and its international creditors, the parties reached a temporary, four-month accommodation that provides a clear sign that both sides still want a durable agreement. They all have good reason to do so, too. Not only does each nation have narrow interests that favor an intact eurozone, but, despite more sanguine accounts of the situation, they all realize how failure risks a destructive financial contagion.
That is because the primary risks across the eurozone have shifted from the borrowing costs on sovereign debt to the danger of capital flight and bank runs. The mechanisms put in place after the 2008-2009 financial crisis were designed mainly in reaction to the first, which they have mitigated, but the second is still a potent threat in the event of a failure of a debt deal for Greece.
To be sure, Europe is better positioned to avoid such a disaster then it was a few years ago. Banks, while not invulnerable, are less exposed. The European Union’s stabilization mechanisms and the commitment of the European Central Bank (ECB) to buy sovereign bonds now promise to short-circuit the chain reaction that could bring another feared financial meltdown. But Europe’s finance ministers are still well aware that the defenses are far from perfect.