FRANKFURT — With an agreement to bail out Spain’s struggling banks, Europe again avoided a financial meltdown in a debt crisis that is in its third year. But far bigger challenges still threaten the Continent and, with it, the world economy.
The most urgent of those concerns is being driven by events in a country at the other edge of the eurozone: Greece.
The Spanish banking rescue will be expensive — as much as $125 billion — but will be well within the means of a European emergency fund. Far harder to calculate are the costs if, after Greek elections next Sunday, the new government reneges on the bailout Greece negotiated with its European lenders a few months ago. That could lead to a withdrawal from the eurozone, threatening the currency union, which has largely benefited more prosperous members like Germany.
What is more, the Spanish bailout will do little to address European banks’ addiction to the borrowed money they have depended on for their daily financing needs.
‘‘The way the currency union has been functioning is not sustainable,’’ Jens Weidmann, the president of the German Bundesbank, told the Welt am Sonntag newspaper Sunday. ‘‘A breakup of the currency union would bring extremely high costs and risks that no one can really predict.’’
Lucas Papademos, a former interim prime minister of Greece, said Greece’s departure from the eurozone would be catastrophic, pushing inflation in the country to as high as 50 percent, putting extreme stress on Greek banks, and slashing living standards.
‘‘The stakes are exceptionally high,’’ Papademos, also a former vice president of the European Central Bank, said last week.
Europe’s big fear is contagion — an infection of financial panic that could spread far beyond Greece. Spain’s leaders have long said Greece’s problems contributed to the general market uncertainties that helped undermine Spanish banks.
On Sunday, Prime Minister Mariano Rajoy cautioned that Spain’s economy, Europe’s fourth-largest, with an unemployment rate of nearly 25 percent, would worsen before getting better. ‘‘This year is going to be a bad one,’’ he said.
A critical question will be how Saturday’s deal will be received by investors on Monday.
‘‘By no means is this a solution,’’ said Adam Parker, at Morgan Stanley. The aid for Spain ‘‘could be a near-term positive from a trading standpoint, but you haven’t solved anything in the long term.’’
The next task for European leaders is to show the rest of the world they are making a credible effort to repair flaws in the eurozone that allowed the problems in one small country, Greece, to threaten the world economy.
On June 28 and 29, European Union leaders will gather in Brussels to discuss, among other things, ways to forge closer fiscal integration. Despite calls from some leaders for shared oversight of budgets and deficit spending, no concrete proposals have been made.
Even if Greece ends up with a government willing to try to live up to the terms of its 130 billion euro bailout deal by meeting its payments and attempting to narrow its wide budget gap, strong doubts remain whether any new leadership in Athens can fulfill those obligations. A lot of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to put the country even deeper in the hole.
‘‘Even in case of a new government, I doubt whether the institutional framework in Greece can guarantee the program,’’ said Jurgen Stark, a former member of the European Central Bank’s executive board. ‘‘Who has the competence to implement the program? That is the key point.’’