International Monetary Fund Managing Director Christine Lagarde said Friday that markets were “perhaps too upbeat” about the European economy and that there was a danger of a “vicious cycle” of high unemployment and high debt if policymakers didn’t act.
In a speech in Paris, Lagarde said that without stronger growth in Europe, “it will be difficult to tackle the legacies of the crisis: high unemployment and high debt. So high in fact, that they seriously impact our future.”
She said there was a “danger of a vicious cycle: persistently high unemployment and high debt-to-GDP ratios jeopardize investment and lower future growth.”
The IMF warned earlier this week in a so-called Article IV consultation that any new shocks to the Eurozone could “sour financial market sentiment, halt the recovery, and push the economy into lower inflation and even deflation.”
The agency also lowered its 2014 Eurozone growth forecast to 1.1%, from 1.2% estimated in the World Economic Outlook in April
Lagarde called on the European Central Bank to ensure that monetary policy remained “supportive until private demand has fully recovered” and its inflation target was met.
Political leaders should tackle structural road blocks to growth in their economies, Lagarde said, while those countries with fiscal flexibility should step up public investment to spur the recovery.
Lagarde said that Europe needed deeper economic integration, and more developed and diversified capital markets to improve investment and speed credit flows.
“In particular, the securitization of lending to SMEs could reduce reliance on bank funding, and alleviate credit constraints for firms,” she said.