World Bank Says ‘Double-Dip’ Possible in Some Europe Economies

Some European nations may experience a second economic slowdown if the region fails to manage its debt crisis, threatening countries from Central Asia to Latin America, the World Bank said today.

“We’re expecting that growth in the second quarter is also likely to be disappointing, quite possibly seeing negative growth in several European countries and a double dip in some of these economies,” Andrew Burns, the World Bank’s manager of global macroeconomics, said at a press briefing telecast from Washington today.

Stocks have tumbled in the past two months on concern that the global recovery will be derailed by the European debt turmoil. Risks to the world’s economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said yesterday.

Government finances in high-income countries in Europe, France, the U.S. and the U.K. are currently on an “unsustainable path,” Burns said. Failure to manage a fiscal consolidation could lead to a loss of confidence among investors in sovereign debt, increasing the risk premium and shrinking capital available for developing countries, he said.

“Even in a less probable but more serious scenario, you could see a crisis occur similar in some senses to the East Asian crisis in some of these more highly indebted countries,” he said. “That could have substantial knock-on effects in Europe and elsewhere.”

Most at Risk

Economies most at risk from such a crisis are those in Eastern Europe, Central Asia, Latin America and the Caribbean, Burns said.

“There would actually be a double-dip in the high-income economies,” Burns said, without naming the economies that would be affected by the less likely scenario. “We estimate that growth there could fall by 0.6 percent in 2011. That’s going to have important knock-on effects in East Asia, particularly because it is a very heavy trading region.”

Asia’s export growth may ease to “more sustainable rates” as China‘s import demand cools and growth in Europe “continues to disappoint,” the World Bank said in its Global Economic Prospects report released in Washington late yesterday. Failure to resolve the debt crisis in Europe could hurt global growth and have “serious” effects on East Asia, where exports and investment are large shares of economies, it said.

The escalation of Europe’s debt crisis has forced the European Union and the International Monetary Fund to offer as much as 750 billion euros ($904 billion) to countries in danger of financial instability.

Germany this week announced a four-year, 80 billion-euro package of budget cuts and revenue-raising measures. Greece, Spain, Italy and Portugal are among euro countries with austerity programs in the works. France plans a three-year spending freeze.

“If markets lost confidence in the credibility of efforts to put policy on a sustainable path, global growth could be significantly impaired and a double-dip recession could not be excluded,” the World Bank said in its report.