European Central Bank President Christine Lagarde has called on European Union leaders 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 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," Christine 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 December 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.

Christine Lagarde also said today that the European Central Bank could "neither go bankrupt nor run out of money" even if it were to suffer losses on the multi-trillion-euro pile of bonds it has bought under its stimulus programmes. 

"As the sole issuer of euro-denominated central bank money, the Eurosystem will always be able to generate additional liquidity as needed," Lagarde said in response to a question by an Italian member of the European Parliament. 

"So, by the definition, it will neither go bankrupt nor run out of money. In addition to that, any financial losses, should they occur, would not impair our ability to seek and maintain price stability," she stated.

Responding to a question, Lagarde added that there is no legal basis for the ECB to cancel the government debt it owns.