IMF Warns of Europe’s Lost Decade

Written by | Wednesday, October 15th, 2014

International Monetary Fund (IMF) chief, Christine Lagarde, warned that the eurozone was on the track to follow Japan’s prolonged cycle of recession and stagnation in the 1990s also known as the “lost decade”. Speaking at the annual meeting of the IMF and the World Bank, Ms Lagarde sought to ring the alarm bells in Europe by stressing that the risk of recession and stagnation in the eurozone could in fact materialize. “We are not saying that the eurozone is heading towards recession, but we are saying that there is a serious risk of that happening if nothing is done,” she concluded. Ms Lagarde added that “in advanced countries, the recovery is being driven by the US and the UK. The eurozone and Japan are lagging behind”.

The eurozone’s economic growth flat-lined in the second quarter of this year, with negative rates recorded in Italy and Germany. Germany’s official figures suggest that the country’s exports decreased by almost 6 percent in August, which was the largest monthly fall since 2009. This latest negative development in Europe’s number one economy is raising the prospect of Germany plunging into a technical recession. Yet, despite staggering exports and shaken confidence in the market, the country still recorded a €17.5 billion surplus. In response to the surplus, Mrs Lagarde hinted that surplus countries ought to invest and consume more to boost growth emphasizing that “if the right policies are decided, if both surplus and deficit countries do what they have to, recession is avoidable”.

For his part, the boss of the Central European Bank (ECB), Mario Draghi, responded that it would not be possible for Europe to recover without painful structural reforms. Speaking at the Brookings Institute, a think tank in Washington DC, Mr Draghi said: “I cannot see any way out of the crisis unless we create more confidence in the future potential of our economies,” and concluded by stressing that “All too often has reform been postponed in bad times…and then forgotten in good times.”

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