IMF Europe—The Path to Sustainable Economic Growth

Remarks by By Christine Lagarde

Managing Director, International Monetary Fund
Bilbao, Spain, March 3, 2014

''Thanks to the formidable actions over the past five years, Europe—and Spain—are now turning the corner. Yet the task is far from finished. Growth remains too low and unemployment too high for us to declare victory on the crisis.

In this context, I would like to speak about two main themes:

• Where we stand on moving away from the crisis in Europe—and the next steps needed to lay the foundations for strong and sustainable growth and job creation; and in turn:
• Where Spain stands in moving out of the crisis—and key next steps to ensure those considerable efforts bear a fruitful harvest.

A Roadmap for Growth and Jobs in Europe

Let me start with Europe. The Euro Area is finally emerging from a deep recession. Momentum in domestic and external demands is growing, and financial conditions have eased somewhat. Our projections in January place growth in the Euro Area at 1 percent in 2014 and 1.4 percent in 2015. This is good news.

Yet in many countries, unemployment is still unacceptably high, especially among young people—1 in every 4 Europeans under the age of 25 looking for a job cannot find one.

High debt levels continue to hold momentum back, and financial fragmentation persists. In addition, the risk of prolonged low inflation—inflation substantially below the ECB’s price stability objective of 2 percent—is also looming and could derail the recovery.

So what does Europe need to attain a trajectory of strong and sustainable growth and job creation? We see three key priorities.

First: strengthen the architecture of the monetary union. This means completing banking union and repairing bank balance sheets.

Why is this so important? A more complete banking union is essential to reduce financial fragmentation and sever the link between banks and sovereigns that has been so destructive.

By the same token, restoring bank health is essential for credit and investment to recover. Here, the work by the ECB on the forthcoming asset quality review (AQR) and stress tests is ambitious but appropriate. It is a complicated exercise, so good communication and implementation are important.

The second priority is to sustain demand through monetary and fiscal policies.

The ECB has already taken a number of strong measures to help the Euro Area. Even further accommodative policies and targeted measures are needed to address low, below-target inflation and achieve lasting growth and jobs.

In terms of the fiscal stance planned for the euro area for 2014, we believe it is broadly appropriate—but it must be complemented at the national level with credible medium-term frameworks, and appropriately paced consolidation.

The third priority is to continue advancing product and labor reforms, which can make a significant contribution in unleashing productivity and restoring competitiveness. Simpler tax systems, streamlined procedures for entry and exit of firms, and stronger national insolvency regimes—all of these can help release investment and increase employment.

In sum, the challenge now for European leaders is to accelerate reforms that would set the stage for a more robust monetary union—one that is able to sustain higher growth and more jobs''.