Markets might be too optimistic on the euro zone's prospects, according to the Christine Lagarde, the managing director of the International Monetary Fund (IMF), who has warned that large amounts of debt, unemployment and low inflation could hit growth in the region.
Speaking at an event in the Robert Schuman Foundation in Paris, she said that Europe continues to face important challenges concerning its long-term future and markets might be at risk of being too complacent.
"The good news is that the European economy is recovering from the crisis. Confidence is improving and financial markets are upbeat. Perhaps too upbeat," she said.
Following the financial crash of 2008, nations across the globe were forced to restructure and rebalancing their economies. Substantial sovereign and bank debt led the euro zone to fall back into recession in 2011. The bloc's economy managed to expand again – just - in the summer of 2013, but has failed to build on that with growth of just 0.2 percent in the last quarter compared to the previous period.
Lagarde added that a "vicious cycle" could hit the flickering signs of recovery in the region and called upon the European Central Bank and euro zone leaders to encourage the perfect economic environment for the euro zone to recover.
Among the measures they should take, Lagarde recommended the region's governments should remove the structural roadblocks that hurt innovation, job creation, and productivity. Monetary policy from the central bank should also be supportive until demand has picked up, she said, also calling upon governments that had the availability to spend more on public investment. She also called for the completion of a banking union in the bloc and the repatriation of bank balance sheets.
"More developed and diversified regional capital markets can support innovation, investment, and long-term growth," she added. "Deeper integration with world markets would improve productivity and plug countries into global supply chains."