The outlook for the global economy has deteriorated rapidly and the continued European debt crisis has hurt the functioning of euro zone financial markets, European Central Bank governing council member Erkki Liikanen said today.

"For the economic slowdown to remain temporary as forecast, confidence must be boosted quickly. If not, there is a danger that the economy will slip into another recession," Mr Liikanen, who also heads the Bank of Finland, said in a statement.

"The risks to economic growth are substantially on the downside. The risks regarding inflation have also changed. In an environment of a particularly high degree of uncertainty, we must continue to monitor all developments very closely."

Mr Liikanen noted the uncertainty has already been reflected in the real economy while the financial intermediation in interbank markets has been disturbed, and urged politicians and shareholders of banks to act.

"The most effective tool for restoring confidence in the financial system is recapitalisation of banks. This is primarily the task of the shareholders," he said.

To solve the ongoing sovereign debt crisis politicians have to be committed to programmes reducing debt and achieving structural primary surpluses, Liikanen said, adding that politicians' decision-making was key to stabilising the crisis.

He also called on governments to implement swiftly decisions European leaders made in July.

"The sovereign debt crisis is no longer only the problem of small countries but a euro area-wide crisis that has taken on systemic dimensions," he said.

"It is of the essence that modifications concerning the European Financial Stability Facility (EFSF) are implemented in full and the EFSF becomes operational."

The Bank of Finland cut its forecast for the world economy growth for this year to 3.9 per cent and to 3.6 percent for 2012, but cited danger of even lower growth.

Reuters