China warns on Europe's threat to growth

 

China warned today that Europe's struggle to contain ballooning debt posed a risk to global economic growth, raising the spectre of a double-dip recession.

Premier Wen Jiabao, addressing business leaders during an official visit to Japan, issued his warnings a day after France admitted it will struggle to keep its top credit rating and days after a downgrade of Spain's credit status again jolted financial markets.

Referring to the risk of a second dip in global economic growth rates, Wen said: "I believe that we can't say with absolute certainty, so we must undertake close observation and act to prevent it."

"The world economy is stable and beginning to revive, but this revival is slow and there are many uncertainties and destabilising factors," he said, adding it was too early to wind down stimulus deployed during the 2007-2009 financial crisis.

Governments around the world ran up record debts during the $5 trillion effort to pull the economy out of its deepest slump since the Great Depression and now face a tough balancing act: how to reduce debt without choking off growth.

"Some countries have experienced sovereign debt crises, for example Greece. Is this kind of phenomenon over? Now it seems that it's not so simple," Mr Wen said. "The sovereign debt crisis in some European countries may drag down Europe's economic recovery."

ECB governing council member Ewald Nowotny summed up the task.

"The big challenge is to prevent a vicious circle in which (a) crisis of the public sector again leads to crisis developments in the financial and real sectors of the economy," he told a conference hosted by Austria's central bank.

Greece stumbled into the global spotlight late last year when it sharply revised its budget deficit figures, provoking a series of credit downgrades and sending its borrowing costs soaring, which in turn fanned fears it may default on its obligations.

While a €110 billion rescue package put together by the European Union and the International Monetary Fund helped avert an immediate meltdown, it failed to dispel fears that other highly indebted euro zone members such as Spain, Portugal and Italy may face a similar fate.

A massive €750 billion emergency scheme cobbled together by EU leaders early this month, again with IMF help, aimed to deter with its sheer size possible speculative attacks on the euro zone's weaker members and thus support the euro.

Reuters