IMF's Lagarde says financial markets 'perhaps too upbeat' on Europe

International Monetary Fund (IMF) Managing Director Christine Lagarde delivers opening remarks at the inaugural Michel Camdessus Central Banking Lecture in Washington July 2, 2014. REUTERS/Gary Cameron

PARIS (Reuters) - The head of the International Monetary Fund warned on Friday that financial markets were “perhaps too upbeat” because high unemployment and high debt in Europe could drag down investment and hurt future growth prospects.

IMF chief Christine Lagarde urged the European Central Bank to keep an accommodative monetary policy until private demand had fully recovered and called on EU countries to tackle structural road blocks that hurt job creation and productivity.

Just days after the IMF warned in a regular report on the euro zone that any new shocks could halt the bloc’s economic recovery, Lagarde hammered the message home at a conference in Paris, saying: “The good news is that the European economy is recovering from the crisis. Confidence is improving and financial markets are upbeat. Perhaps too upbeat.”

The IMF has urged the euro zone to support economic demand, complete a reform of the banking sector known as banking union and advance structural reforms.

“There is the danger of a vicious cycle: persistently high unemployment and high debt-to-GDP ratios jeopardize investment and lower future growth,” Lagarde said on Friday, according to the prepared text of her speech.

In its latest annual report, the Bank for International Settlements warned at the end of June that ultra-low interest rates had lulled governments and financial markets into a false sense of security.

But world markets have since come under pressure as the suspected downing of a Malaysian airlines jet at the Ukraine-Russia border, new sanctions on Moscow and unrest in Gaza have sent investors scurrying into defensive assets.

Reporting by Leigh Thomas; Writing by Ingrid Melander; Editing by Brian Love and Susan Fenton