Cracks emerge in effort to drag global economy out of recession

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LONDON, Dec 11 (Reuters): Cracks emerged in the global effort to drag the world out of recession Thursday with Germany attacking Britain ahead of an EU summit for rushing into debt to bail out industries and pump up growth.
Deflation fears grew in China, the United States moved closer to an auto industry bailout, and South Korea's central bank cut interest rates a record amount and pledged more drastic action to keep its economy afloat.
In a move that suggested trouble ahead for concerted European and perhaps world efforts to end the financial crisis and restore global economic growth, Germany criticised countries for rushing into untested economic rescue packages.
In an interview with Newsweek magazine, Finance Minister Peer Steinbrueck urged governments to pause before pledging to spend billions of dollars to try to push their economies out of trouble.
"The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing," he said in the interview, published on the magazine's website Wednesday.
He singled out British Prime Minister Gordon Brown for particular criticism, accusing him of switching to economic policies that would saddle a generation with debt.
"The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking," he said.
Another German policymaker, European Central Bank (ECB) Executive Board member Juergen Stark, also indicated concerns about responses to the crisis, saying Wednesday that the ECB does not have a lot of room for manoeuvre after its interest rate cut last week.
The comments came as European Union leaders were to meet in Brussels for a summit. French Economy Minister Christine Lagarde was quoted in Germany's Frankfurter Allgemeine Zeitung as saying collective action was needed to fend off a major recession.
But she added: "I am not shocked by the German position. We have the same analysis, diagnosis and the same goals. The tempo is not exactly the same. The British have marched a bit ahead of everyone else."
Deflation pressures that are spreading through Europe and the United States also now appear to be threatening China, the world's fourth-largest economy.
China's annual consumer price inflation fell to a near two-year low in November, a report showed Thursday, a day after data reflected a collapse in wholesale prices and a startling drop in exports and imports.
While the slowdown in inflation can be explained by the sharp decline in commodity prices, demand-sapping recessions underway in Europe, Japan and the United States point to a heavy foot on factory-gate and consumer inflation in one of Asia's top economies.
"That would then raise the risk that disinflation or deflation for manufactured goods prices in China may become more entrenched," said Glenn Maguire, Asia Pacific chief economist with Societe Generale in Hong Kong.
Analysts, meanwhile, wondered when the Bank of Korea's cumulative 2.25 percentage points of rate cuts since October will have a significant impact on financial markets.
Korea's benchmark rate was cut by an unprecedented 100 basis points to 3.0 per cent Thursday, the lowest since the current policy system was adopted in 1999.
"Rate cuts have yet to produce a visible impact on market rates and bank lending, but a low interest rate is still a prerequisite to reviving the economy," said Goh You-sun, an economist with Daewoo Securities.
"Once financial markets stabilise, low rates will help funds flow into the real economy."
The US automaker industry, reeling from financing pressures and a consumer slump, took one step closer to securing a 14-billion-dollar rescue from Washington. But the plan faced uncertain prospects in the Senate.
The Democratic-controlled House of Representatives approved the bailout legislation Wednesday. It would force US automakers to restructure or fail, but Senate Republican pressure could slow down passage of the measure or even block it.
Failure of any of the so-called Big Three carmakers-Ford Motor Co, General Motors Corp or Chrysler LLC-would threaten countless more jobs as well as send shockwaves through the global supply chain.
On financial markets, shares were mixed with Japan's Nikkei rising 0.7 per cent and Europe's FTSEurofirst down 0.8 per cent.