18 July 2014
Last updated at 22:03
IMF head Christine Lagarde has warned that financial markets maybe a little too upbeat given the persistently high levels of unemployment and debt in European economies.
She also warned that continuing low inflation could undermine growth prospects in the region.
But she did say the European economy was recovering and interest rates should stay low until demand picks up.
Last month, the European Central Bank cut its main interest rate to 0.15%.
It also cut its deposit rate – the rate it pays banks to keep money on deposit – to -0.1%, becoming the first major central bank to introduce negative rates.
ECB chief Mario Draghi has since said interest rates will remain at their current level for an “extended period of time in view of the current outlook for inflation”.
Inflation in the eurozone is currently 0.5% – the ECB would rather it was close to 2%.
“Obstinately low inflation can seriously undermine growth,” Ms Lagarde warned in a speech in Paris on Friday.
“Monetary policy should remain supportive until private demand has fully recovered” and the ECB “has achieved its price stability objective.”
The IMF head did say there was some “good news”, as the European economy was “recovering from the crisis.
“Confidence is improving and financial markets are upbeat, perhaps a little too upbeat,” she said.
“There is a danger of a vicious cycle – persistently high unemployment and high debt-to-GDP ratios jeopardize investment and lower future growth,” she added.
Ms Lagarde’s comments echo those made by the Bank for International Settlements last month.
The Basel-based organisation – usually dubbed the “central banks’ central bank” – talked of a “puzzling disconnect between the markets’ buoyancy and underlying economic developments globally”.