"Some preliminary analysis by the IMF for the euro-area countries suggests that over five years, large-scale product market, labor and pension reforms could boost GDP by 4.5 percent," she said in an address entitled, "Anchoring Stability to Sustain Higher and Better Growth."
Just after voters elected a socialist president in France to replace austerity-advocate Nicolas Sarkozy, the IMF issued a statement in which Lagarde called for a balance between stimulus spending and reducing debt.
"We know that fiscal austerity holds back growth, and the effects are worse in downturns, so the right pace is everything -- and the right pace will be country specific," said Lagarde, who was the finance minister in France taking the directorship at the IMF.
"So again, there's no avoiding this brake of fiscal adjustment," she said referring to austerity budget strategies.
"But if calibrated correctly, we can make sure it doesn't do too much harm to growth," she said.
The other two brakes, weak banks and poor housing markets, must be addressed at country and regional levels, Lagarde said.