The European economy faces multiple challenges that need to be addressed, but there is reason to be optimistic about Europe, International Monetary Fund Managing Director Christine Lagarde told delegates at the World Economic Forum in Davos on Wednesday.
"I, for one, am optimistic about Europe's future," Lagarde said. "What they have done in the last 18 months is remarkable...They need to keep at it and they need to challenge the conventional wisdom according to which when things get better, they relax."
(Read more: After Davos: Global Calm or Profound Change?)
Among other things, the euro zone needs deeper banking union and deeper fiscal union, she said.
Countries needed to pursue often "painful" fiscal consolidation, she said.
Meanwhile the U.S. needs to prevent "avoidable" policy mistakes, she said, while Japan has not reached an agreement on medium-term objectives.