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Wednesday 27 August 2014

IMF's Christine Lagarde warns European growth many not be sustainable

Colm Kelpie

Published 10/12/2013 | 13:40

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International Monetary Fund managing director Christine Lagarde
International Monetary Fund managing director Christine Lagarde

INTERNATIONAL Monetary Fund (IMF) head Christine Lagarde has warned that current European growth may not be sustainable, claiming reforms are needed across the EU to jump start revival.

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The former French Finance Minister said that while Europe appeared to be ''turning the corner'', it was premature to be declaring victory.

In a wide-ranging speech on the outlook for the continent delivered to the European Economic and Social Committee, Ms Lagarde said a failure to revive investment and employment would not bode well for the future.

''There is a palpable sense of optimism in some quarters that the European crisis is over,'' she said.

''But can a crisis really be over when 12pc of the labour force is without a job? When unemployment among the youth is in very high double digits, reaching more than 50pc in Greece and Spain? And when there is no sign that it is becoming easier for people to pay down their debts?''

As European Finance Ministers held a simultaneous meeting to try and reach a way forward on the complex issues surrounding a pan European banking union, the IMF chief said growth rates and output levels remained well below what they should be.

She said the only durable solution was in ''jump-starting'' growth, setting out four priority areas including reviving credit, supporting demand, reducing debt and fostering growth friendly labour markets.

''The goal of reform is to break down barriers to growth. There is no silver bullet. This means taking on entrenched positions and vested interests. It means bringing in more competition and flexibility to spark innovation, boost competitiveness and enable resources to go where they are most productive,'' she said.

''Reforms are needed across all of Europe.''

Ms Lagarde said growth will not pick up substantially unless households, businesses and countries get their finances in order and that reducing the debt burden makes borrowers more attractive in the eyes of lenders and revive credit.

''Finally, it remains important to break the pernicious links between banks and sovereign balance sheets,'' she said.

''This can be done by creating the conditions to ensure that the future cost of fixing banks will no longer fall primarily on the public sector. All this would help put debt on a downward trajectory.''

She said labour market reforms can make economies better placed to absorb future shocks, and held up the German labour market as having worked well during the crisis.

Ms Lagarde also called for wage setting agreements to be improved, lower regulatory hurdles for the entry and exit of firms and simpler tax systems.

''For example, electricity prices for Italian industry are about 30pc higher than the European average and high electricity prices raise the cost of business in Portugal,'' the IMF head said.

''In France, the average size of firms is much smaller than in Germany because firms with more than 50 workers become subject to about 30 additional laws and regulations. This makes it harder for French firms to reach the critical mass needed to access export markets.''

Ms Lagarde said Europe was on the right track but that there can be no letting up on reforms until growth has recovered sufficiently to stop the rise in unemployment and debt.

 

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