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World Bank head says stimulus alone won't fix economy

LONDON (Reuters) - The world economic crisis will be deeper and longer if government stimulus packages are too modest and states fail to take joint action to fix their banks, World Bank President Robert Zoellick said on Friday.

Warning that 2009 will be a “very dangerous year,” he said state stimulus alone would give only a short-lived economic boost that would soon evaporate unless credit flowed again.

“The danger now is doing too little, too late,” Zoellick told reporters in London as G20 finance ministers and central bankers gathered in southern England ahead of a leaders’ summit next month. “Incrementalism will prolong and increase risk.

“If you don’t take on the banking issue, the stimulus is just like a sugar high. It pushes some energy into the system but then you get the letdown unless you reopen the credit markets.”

Japan on Friday joined the U.S. push for more government spending to fight the economic crisis before the G20 summit marked by a rift between Washington and Europe on the priorities in the battle with the global crisis.

Zoellick urged the G20 finance ministers to expand the IMF’s resources, condemn protectionism and endorse a series of targeted, practical steps to rescue the world economy.

Stimulus measures were currently running at about 1.4 percent of gross domestic product, short of the International Monetary Fund’s 2 percent target, he said.

He urged governments to be bolder and to continue stimulus measures into 2010, while being careful to consider how they will get their budgets back under control.

“It is important to show fiscal sustainability,” he said.

The crisis will only end if the global economy is rebalanced, with the United States spending less and China saving more, he added.

“U.S. consumption alone will no longer rescue the world. One will have to have a new model that must be broader and include the developing world,” he said.

Editing by Mike Peacock