FRANKFURT (Reuters) – The eurozone economy may well avoid the most pessimistic scenario envisioned at the start of the COVID-19 pandemic, but it still faces risks of viral mutations, the Bank President said on Thursday European Central Christine Lagarde.
The ECB is starting to debate whether to scale back its massive bond buying program as the economy emerges from its coronavirus-induced slump, with divisions emerging between policymakers in different countries.
“The improved economic outlook thanks to rapid progress in vaccination campaigns has reduced the likelihood of severe scenarios,” Lagarde told the European Parliament.
“Of course, the nascent recovery still faces uncertainty also due to the spread of mutations in the virus.”
She was speaking in her capacity as Chair of the European Systemic Risk Board, the financial stability oversight body of the European Union.
In its annual report released on Thursday, the ESRB said the most indebted states in the EU could hardly afford a rise in yields after borrowing heavily to finance their responses to the pandemic.
EU governments have spent heavily to consolidate their virus-stricken economies, increasing debt piles that already exceeded a year of economic output before the pandemic began in Italy and Greece.
The ESRB said a further rise in U.S. bond yields could push up borrowing costs across the Atlantic.
“The spillover effects (…) could weigh on economic activity in the EU if the steepening of the yield curve were to significantly precede the economic recovery in the EU,” he said.
“A significantly larger rise than currently observed in European sovereign bond yields could have a negative impact on debt dynamics, especially in countries that have already entered the COVID-19 crisis with a high debt burden . “
Founded following the last financial crisis, the ESRB identifies the biggest financial risks facing the bloc and makes recommendations to the authorities, although these are not binding
Reporting by Francesco Canepa; Editing by Alison Williams and John Stonestreet