The International Monetary Fund has warned that a marked rise in political risks threatens to derail the euro zone's still fragile recovery, adding that the region is at a "critical juncture", a week ahead of the UK's vote on whether to remain in the EU.

In an unusually strongly phrased intervention, the fund urged the euro zone’s economic decision makers to take swift action to counter growing political divisions and scepticism about the EU project.

The IMF is increasingly concerned over rising political risks around the world ranging from protectionist rhetoric in the US presidential campaign to support for populist parties in Europe. It also is anxious about the potential impact on the global economy and financial markets of British voters deciding to quit the EU.

Reform

The IMF used the concluding statement of its annual policy assessment of the euro zone to call on political leaders to reform their labour and product markets and for countries to spend more if they have the capacity to do so. “Without more decisive actions to boost growth and strengthen integration, the euro area may be subject to instability and repeated crises of confidence,” it said.

However, the IMF acknowledged that divisions and Euroscepticism had “weakened prospects for collective action”, which left the single currency area “increasingly vulnerable to risks while there is little policy space”.

It also warned that the European Commission and national capitals have been lax in policing agreed limits on national debt and deficits, saying that enforcement of the rules had been “weak, undermining credibility in the framework.”

– Copyright The Financial Times Limited 2016