Europe: Out of ICU but still ill

European leaders have been working for months to pull Greece and other European nations out of the abyss, with some success. But more work is needed.

Douglas J. Elliott, who worked as an investment banker for two decades, is a fellow at the Brookings Institution.

Europe does seem to be healing, with substantially more good news than bad, assuming agreements to deal with Greece's immediate financial needs are indeed reached shortly.

And European leaders deserve credit for taking key steps in recent months.

They have moved slowly but steadily to create the infrastructure of the financial "firewall" intended to defend against potential disaster, while also agreeing on budget restraints to help protect against a repeat of the profligacy that led to this debt crisis.

For its part, the European Central Bank has flooded the banking system with liquidity to substantially reduce the chance that a major bank failure would trigger a more dangerous phase of the Euro Crisis.

The new leaders in Italy, Spain, and Greece have also been taking brave and necessary steps to sort out their own excessively rigid and inefficient economies.

As we see from the riots in Greece, it is not easy to clean away the barnacles of privilege and outdated tradition that accumulated over the years.

Nonetheless, Europe is not remotely out of peril. Here is a partial list of dangers to worry about:

Greek bailout. There is still the possibility that the multi-sided deal being worked out between the Greeks, European governments, the ECB, the IMF, and private sector creditors could fail.

This is unlikely, but it could do a great deal of damage, as Europe is not really ready yet to deal with a disorderly Greek default.

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Give Europe another year, or perhaps even half a year, and Greece will be much less important to the future of the eurozone. Right now, though, it could make things very messy.

Portugal's mounting debt. European leaders are very supportive of the Portuguese, who are seen as trying hard to do the right things and making progress. However, Portugal's economy is in a serious recession, debt levels remain very high, deficits are adding to it, and the long-term competitive position of the nation is weak.

The main danger is that we could find that it, like Greece, is in such a bad situation that debt reductions are needed.

Another possibility is that a worsening economy may lead the people to demand debt reduction, a la Greece, even if economists believe it not to be necessary.

Spain's shaky economy. The Spanish economy is not in as bad shape as Portugal's is, but it's awful enough, particularly when viewed in terms of unemployment, especially of youth.

Spain is a big enough country that failures to meet economic targets could spook the financial markets into another round of pullbacks from European debt.

Italian politics. There will come a time when the politicians tire of technocrats running the country and judge that the current government has inflicted so much pain that it will be acceptable to the public to remove it.

Right now, Prime Minister Monti is still known as "Super Mario," but this will not last forever. There are few things more painful than watching Italian politicians at work, so there are plenty of ways that they could scare the financial markets into a new crisis.

European recession. Europe's economy shrank last quarter and it may well shrink again this quarter. Most economists believe the recession will be mild and relatively short, barring a policy disaster.

Unfortunately, economists are not actually all that good at predicting the course of recessions. There is the danger that an external factor, such as a move by Iran, could shock the European economy into a deeper recession.

There is also the chance that a recession spirals downward on its own as bad times breed pessimism, which leads to a pullback in consumption and investment, and a worse recession.

Banking crisis. Flooding the banks with cheap money makes it unlikely that any major banks will fail in the short-run. But, it is not impossible.

First, they do have to come up with acceptable collateral in order to borrow from the Eurosystem and some banks could run out.

Second, if hidden losses come to view, it may become apparent that one or more banks are dead men walking, in which case all the liquidity in the world is unlikely to stop disaster.

Backlash in Germany or France. There remains the risk that voters in some of the stronger countries of the eurozone rebel in a serious way against what they perceive as bailouts of the weaker nations using their money.

This is not likely without something else going wrong in the eurozone first, but it is a risk that is simply hard to quantify.

Certainly there are many worries about the potential for Marine Le Pen, a representative of the nationalistic hard right, to make it to the second round of the French presidential elections, although it would be very hard for her to win that round and become president.

Nonetheless, a strong showing by her might make it considerably more difficult for the next French president to do what needs to be done.

I still believe that Europe will most likely muddle through, but it would be a mistake to assume the patient is healed yet.