The global financial crisis has created a "three-speed economy" with the eurozone at the bottom and a too-big-to-fail banking model that is "more dangerous than ever", the managing director of the International Monetary Fund has said.
In a speech at the Economic Club of New York on Wednesday, Christine Lagarde described the differences between global regions as "starker than ever".
"In far too many countries, improvements in financial markets have not translated into improvements in the real economy—and in the lives of people," she said. "We are now seeing the emergence of a “three-speed” global economy—those countries that are doing well, those that are on the mend, and those that still have some distance to travel."
While East Asia was identified as an area that was "doing well", and US and Switzerland were "on the mend", Ms Lagarde said that the eurozone and Japan belonged to a "third speed", where countries still had "some distance to travel" to recover.
She said that many banks in the eurozone were still at an early stage of repair, with "not enough capital and too many bad loans on their books". This meant that the region's low interest rates were not being passed on to the wider economy.
"Monetary policy is “spinning its wheels”—meaning that low interest rates are not translating into affordable credit for people who need it," said Ms Lagarde.
"The plumbing is clogged up, and we are seeing more financial fragmentation [...] So the priority must be to continue to clean up the banking system by recapitalizing, restructuring, or—where necessary—shutting down banks."
Ms Lagarde called for more "intensive and intrusive" supervision of lenders to combat the problem.
"The oversize banking model of too-big-to-fail is more dangerous than ever. We must get to the root of the problem with comprehensive and clear regulation, more intensive and intrusive supervision, as well as frameworks for orderly failure and resolution—including across borders, and with authorities empowered to oversee the process," she said.
Ms Lagarde also addressed concerns by emerging markets such as China over a potential fallout from "exceptionally loose monetary policy" .
"in present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative. We know that inflation expectations are well anchored today, giving central banks greater leeway to support growth," she said.
Last weekend, Ms Lagarde praised Japan's latest attempt to banish deflation by pumping trillions more yen into the economy as a "welcome step" in supporting global growth.
Ms Lagarde also said that while America's recovery had strengthened recently, its problems were "far from" solved. She said America's $85bn (£55.5bn) sequestration cuts, which would cut US output by 0.5pc, risked "throwing away needed growth, especially at a time when too many people are still out of work.
"Adjustment is too aggressive in the short term, and too timid in the medium term," said Ms Lagarde, "This adds to uncertainty and casts a shadow on the recovery."