The fiscal situation in some European countries is so bad there is a danger markets will lose faith in them, European Central Bank president Jean-Claude Trichet warned today.
"Some countries are in a relatively favourable position because their past management was wise and prudent, while others are already very close to losing their credibility," he told French newspaper
Le Monde, saying it could stall the recovery process.
This could even the stall the nascent recovery, he added.
"The success of the recovery in Europe depends on the confidence of investors in the creditworthiness of sovereign issuers."
A hit in government credit ratings would also increase interest rates in the private sector, he said, and added governments must get fiscal consolidation on a credible path in 2011 at the latest.
Mr Trichet repeated his earlier comments key interest rates are appropriate at the moment and that the ECB will progressively unwind its non-standard measures.
He also repeated the well-worn line that it is important to note the US authorities have stated the strong dollar is in their interest.
The euro was trading at 1.4912 at 1028 GMT, at levels some politicians have warned could handicap the euro-zone recovery.
Trichet also said third quarter euro zone gross domestic product (GDP) data, which showed the region pulled out of recession, confirmed the ECB's base scenario of a progressive pickup in the economy.
A Eurostat flash estimate showed last week the euro-zone grew 0.4 per cent in the third quarter from the previous one.
But caution was still needed and there was much uncertainty, especially about next year's growth, Mr Trichet added. "We cannot yet claim victory," he was quoted as saying.
Reuters