Source: The Canadian Press

The World Bank is warning that the European debt crisis could derail the global economic recovery.

In its latest global economic prospects report, released Wednesday, the bank says Europe’s debt problems have created new hurdles on the road to sustainable medium-term growth.

Greece, Spain, Britain and other European countries face huge government debts and are moving to cut spending in a bid to balance their books and get their costs under control.

Many fear the cuts will slow growth in Europe and undermine the fragile recovery from recession now going on in many countries.

The World Bank predicts the global economy will grow between 2.9 and 3.3% this year and next, and between 3.2 and 3.5% in 2012. That would reverse a 2.1% decline in 2009.

The bank says developing economies are expected to grow between 5.7 and 6.2% each year from 2010-2012.

Meanwhile, high-income countries are projected to grow by between 2.1 and 2.3% in 2010 — not enough to undo the 3.3% contraction in 2009. In 2010, those countries could grow by between 1.9% and 2.4%.

“The better performance of developing countries in today’s world of multipolar growth is reassuring,” Justin Yifu Lin, the World Bank’s chief economist, said in the report.

“But, for the rebound to endure, high-income countries need to seize opportunities offered by stronger growth in developing countries.”

The World Bank says the global recovery faces several important headwinds over the medium term, including reduced international capital flows, high unemployment, and spare economic capacity exceeding 10% in many countries.

While the impact of the European debt crisis has so far been contained, prolonged rising government debt could make credit more expensive and curtail investment and growth in developing countries, the financial agency warns.

On the upside, world merchandise trade has rebounded sharply and is expected to increase by about 21% this year, before growth rates taper down to around *% in 2011-2012.

The World Bank’s projections assume that efforts by the IMF and European institutions will stave off a default or major European government debt restructuring.

But even so, developing countries and regions with close trade and financial connections to highly indebted countries may feel serious ripple effects.

“Demand stimulus in high-income countries is increasingly part of the problem instead of the solution,” said Hans Timmer, director of the Prospects Group at the World Bank.

“A more rapid reining in of spending could reduce borrowing costs and boost growth in both high-income and developing countries in the longer run.”

Regardless of how the debt situation in high-income Europe evolves, a second round financial crisis cannot be ruled out in certain countries of developing Europe and Central Asia, where high debts and slow recovery could threaten the banking sector.

“Developing countries are not immune to the effects of a high-income sovereign debt crisis,” said Andrew Burns, manager of global macroeconomics at the World Bank.

“But we expect many economies to continue to do well if they focus on growth strategies, make it easier to do business, or make spending more efficient.”