World Bank sees risks to growth in EU tightening

(WASHINGTON) - Europe's solutions to the eurozone crisis could hit growth around the world and especially in neighboring countries where EU banks are strong, World Bank President Robert Zoellick warned Monday.

Zoellick called the world financial system and economy "fragile" and vulnerable to slashed government spending and contracting bank lending -- likely results from Friday's EU pact on tighter fiscal discipline.

"As I start to look into the end of the year and 2012, I think it's a pretty dicey situation overall. And there's not much room for people to make missteps," Zoellick told CNBC television.

"I'm not suggesting we're in a doom period here. But what I can see is that a few mis-turns here or there, including over the coming weeks coming out of this European summit, could raise the risk considerably."

He said the push to force EU banks to strengthen their capital bases -- many have large holdings of downgraded European sovereign and private debt -- is forcing them to rein in lending, which only further stalls growth.

"The effect of the European banks' credit contraction on neighboring markets... could exacerbate what is already a difficult situation," he said.

"A lot of them are starting to sell assets, starting to run off their books. So in areas like trade finance we're starting to see a more constricting environment."

That could hit growth in the Balkans, Central and Eastern Europe where Western European banks have a big presence, said Zoellick.

But the threat also extends to the Middle East and North Africa in particular, he added.

While Europe's leaders are focused on their immediate crisis, he said, "the effect of the European banks' credit contraction on neighboring markets... could exacerbate what is already a difficult situation."

"Financial systems always have to relate back to the real economy," he said.

He said the German-driven approach accepted at Friday's summit to address the eurozone crisis -- a push for tighter fiscal discipline, better economic management and stronger banks -- was mostly good.

But, he said, "the German formula needs a little tweaking."

"I think they're right on fiscal reform. I think they're right on the structure reforms.

"But it's awful hard to do if the world economy is slowing down and Europe is slowing down."