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Europe's Leaders Must Rethink Austerity Strategy: Ex-IMF Chief

Peter Weber | Getty Images

European leaders must re-think their strategy in response to the euro zone's debt crisis as austerity measures will only go so far in solving the problems, former IMF chief Rodrigo Rato told CNBC.

"Things are serious, Europe is the only area in the world that is having a double-dip and that means that European leaders must re-think the strategy. We need austerity, and to deleverage, but we need a more comprehensive strategy where monetary conditions are essential," Rato said.

According to Rato, the divide between the "winners and losers was very bad" for both Southern Europe and the core euro zone nations.

"Austerity when you have an overhang of debt is necessary, but nominal targets can be very misleading," Rato said.

"If you have a society where GDP growth is negative, it's very difficult that the relationship between GDP and debt is going to be reduced. So nominal targets have to be soft and have to be measured in relation to structural changes," he said.

Rato was head of the IMF between 2004 and 2007 and was also Spain's Economy Minister in the mid-1990.

His last role was as Chairman at beleaguered Spanish bank Bankia – now government controlled – after a bailout by the Spanish government earlier this year.

In July, Spain's high court opened an investigation into Rato and other top Bankia executives, following allegations of fraud and associated charges during his tenure. The collapse of the bank was seen as the trigger for the new, more troubled phase of the Spanish economy and threw its banking system into the spotlight.


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