IMF chief warns against prematurely declaring an end to the economic crisis, saying joblessness puts future growth at stake
Christine Lagarde, the managing director of the International Monetary Fund, has warned that long-term prospects for eurozone growth look bleak unless politicians act urgently to stoke domestic demand and tackle youth unemployment.
After months of relative calm in financial markets, and with Ireland due to end its painful bailout programme and its reliance on the IMF this weekend, some European politicians have declared the worst to be over for the 17-member single currency zone.
But speaking at the European Economic and Social Committee in Brussels, Lagarde warned against prematurely declaring an end to the economic crisis.
"Can a crisis really be over when 12% of the labour force is without a job? When unemployment among the youth is in very high double digits, reaching more than 50% in Greece and Spain? And when there is no sign that it is becoming easier for people to pay down their debts?"
She warned that high youth unemployment could jeopardise the economy's ability to grow in the future, by creating a generation of young people without the skills to take their place in the jobs market. "What is at stake is Europe's potential for growth in the future," she said.
"Unemployment at a young age means a lack of on-the-job training, depreciating skills, and possible withdrawal from the labour market. Experience tells us that long spells of unemployment lead to a less productive workforce down the road."
Lagarde called for a raft of reforms, including fixing the battered banking sector to "jump-start growth", and warned that with monetary policy all but exhausted, and interest rates already close to zero, governments might yet need to resort to a new fiscal stimulus if recovery fails to take hold.
"In the event growth is low for a protracted period of time and monetary policy options are depleted, fiscal policy will need to provide more support to domestic demand," she said.
In a veiled criticism of Germany, which has tended to rely on an export-led growth model, Lagarde suggested that boosting Europe's growth potential will require stoking demand at home too.
"Most of the demand for European goods and services comes from abroad, not from within, leaving the economy at the mercy of the ups and downs of global trade. European demand for European products remains lacklustre."
After European Central Bank president Mario Draghi unexpectedly announced a cut in interest rates last month to stave off deflation, Lagarde called for the ECB to "keep interest rates low and convince investors that it will do so for as long as is necessary".
The IMF would also like to see a series of labour market reforms, including making it easier for skilled employees to cross Europe's borders in search of work; cutting employment regulation; and shifting the burden of taxation from income on to consumption, in the hope of boosting future job prospects.
"There can be no letting up on reforms until growth has recovered sufficiently to arrest the rise in unemployment and debt," Lagarde said.
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