Facing gloomy outlook, Lagarde calls for unlocking EU aid

FILE PHOTO: European Central Bank President Christine Lagarde t in Brussels, Belgium February 6, 2020. REUTERS/Francois Lenoir

FRANKFURT (Reuters) - European Central Bank President Christine Lagarde called on European Union leaders on Thursday to end a potentially damaging budget impasse and unlock aid for a region that is facing a severe hit from the second wave of the coronavirus pandemic.

The EU’s 750 billion-euro recovery fund, vital for nations hit hardest by the pandemic, was blocked by Hungary and Poland this week, raising the risk that even if a compromise is reached eventually, funds will be delayed.

“The Next Generation EU package must become operational without delay,” Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs in a hearing.

“The euro area economy is expected to be severely affected by the fallout from the rapid increase in infections and the reinstatement of containment measures, posing a clear downside risk to the near-term economic outlook,” she said.

With the euro zone heading back into recession this quarter, Lagarde repeated a promise to ease policy at the ECB’s Dec. 10 meeting, with measures focused on more emergency government bond buys and cheap loans to banks.

“The key challenge for policymakers will be to bridge the gap until vaccination is well advanced and the recovery can build its own momentum,” she said.

Lagarde argued that the ECB’s job will be the “preserve” low financing costs, a hint taken by economists to mean that the ECB is not necessarily looking to lower borrowing costs, which are already at record lows, but to ensure these conditions persist for longer.

“When thinking about favourable financing conditions, what matters is not only the level of financing conditions but the duration of policy support, too,” Lagarde said.

Reporting by Balazs Koranyi; editing by Francesco Canepa, Larry King