FRANKFURT (Reuters) – The eurozone economy could avoid the most pessimistic scenario expected at the start of the COVID-19 pandemic, but remains exposed to virus mutation risks, European Central Bank President Christine Lagarde said Thursday.
The ECB begins to debate whether to cut its massive bond-buying program as the economy has passed its coronavirus-induced slump and policymakers in different countries are divided.
“The improved economic outlook due to the rapid progress in vaccination campaigns has reduced the likelihood of serious scenarios,” Lagarde told the European Parliament.
“Of course, the incipient recovery is still faced with uncertainty due to the spread of virus mutations.”
She spoke in her role as Chair of the European Systemic Risk Board, the guardian of financial stability in the European Union.
In its annual report released on Thursday, the ESRB said the EU’s most indebted countries could not afford a rise in yields after taking out massive loans to fund their responses to the pandemic.
EU governments have spent heavily to prop up their virus-stricken economies, adding to mountains of debt that exceeded a year’s economic output in Italy and Greece before the pandemic began.
The ESRB said that further increases in US bond yields could drive borrowing costs across the Atlantic higher.
“Spillover effects … could weigh on the EU economy if the steepening of the yield curve noticeably precedes the economic recovery in the EU,” it said.
“A noticeably stronger rise in yields on European government bonds than is currently observed could have a negative impact on debt dynamics, especially in countries that have already entered the COVID-19 crisis with increased debt.”
The ESRB, established after the last financial crisis, identifies the bloc’s biggest financial risks and makes recommendations to the authorities, but these are not binding
Reporting by Francesco Canepa; Adaptation by Alison Williams and John Stonestreet