HELSINKI (MNI) – The global economy could fall back into recession
unless actions are taken quickly to boost economic and financial
confidence, European Central Bank Governing Council member Erkki
Liikanen said Monday.

In a written statement issued by the Bank of Finland, which he
heads, both Liikanen and the bank itself described a precarious and
gloomy global economic situation and warned that politicians must not
delay any longer in addressing it.

“In order for the economic slowdown to remain temporary as
forecast, confidence must be boosted quickly,” Liikanen said. “If not,
there is a danger that the economy will slip into another recession.”

His comments were flanked by the bank, which stated that, “the
outlook for the world economy has deteriorated rapidly.” It noted the
“increased uncertainty” in financial markets, declining stock prices and
rising yields in government and corporate bond markets, which have
increased financing costs and moved capital towards safe haven
investments.

The bank also noted that consumer and business confidence has
fallen in many countries, which it said was a harbinger of “very weak”
economic activity in the short-term.

“Uncertainty always erodes growth prospects,” Liikanen warned. He
repeated the ECB’s recently modified outlook on the world economy,
saying that “the risks to economic growth are substantially on the
downside” while inflation risks “have also changed.” He meant that the
ECB no longer considers price risks to be on the upside but rather
broadly balanced.

“In an environment of a particularly high degree of uncertainty, we
must continue to monitor all developments very closely,” Liikanen said.

“The most effective tool for restoring confidence in the financial
system is recapitalization of banks,” he added. “This is primarily the
task of the shareholders.”

Liikanen also noted that the Eurozone debt crisis is no longer
restricted to a group of small countries, but has taken on “systemic
dimensions.” What is needed now is no longer reform in a single troubled
country but rather a collective commmitment.

“Achieving structural primary surpluses is a prerequisite for the
sustainability of debt levels. If Europe fails to constrain the debt
crisis, the loss of confidence will also undermine world economic
growth,” he warned.

Liikanen urged the Eurozone’s national governments to approve the
new powers for the European Financial Stability Facility that were
decided by EMU leaders at their summit on July 21. Doing so, he said,
“is of the essence.”

For its part, the Bank of Finland added that, “restoring confidence
in politicians’ ability to make decisions is key to stabilising the
situation.”

[TOPICS: M$$EC$,M$X$$$,MGX$$$,M$$CR$,MT$$$$]