The eurozone economy is expected to grow just over 1 percent this year before expanding 1. 5 percent in 2015, the International Monetary Fund (IMF) said on Monday.
The euro area recovery is taking hold as real output has expanded for four consecutive quarters, and financial market sentiment has improved markedly, the Washington-based lender said after it concluded the 2014 Article IV Consultation with the region.
"But the recovery is neither robust nor sufficiently strong," the IMF said in a statement, highlighting the weak demand, low inflation and financial risks in countries still grappling with heavy debt and high unemployment.
The recovery is also subject to external risks, including a slowdown in emerging market growth, escalation of geopolitical conflict, and an abrupt exit from unconventional monetary policies in the United States, it said.
It noted over the medium term, there is a risk of stagnation, which could result from persistently depressed domestic demand due to deleveraging, insufficient policy action, and stalled structural reforms.
"Risks to growth are still tilted to the downside. With limited policy space in the near term, further negative shocks -- either domestic or external -- could undermine financial market sentiment, halt the recovery, and push the economy into lower inflation and even deflation," it said.
The IMF said if inflation remains too low, consideration could be given to a large-scale asset purchase program, primarily of sovereign assets.
The IMF also underlined the urgency of repairing bank balance sheets and reducing financial fragmentation. While supporting the broad strategy and the ambitious timetable for bank recapitalization, the institution saw merit in maintaining some flexibility to take account of market conditions and financial stability concerns./.