Reuters reports that European Central Bank President Christine Lagarde said that the euro zone economy may well avoid the most pessimistic scenario envisaged at the start of the COVID-19 pandemic but it still faces risks from virus mutations.

"The improved economic outlook on the back of rapid progress in vaccination campaigns has reduced the probability of severe scenarios," Lagarde told the European Parliament.

"Of course, the nascent recovery still faces uncertainty also due to the spread of virus mutations."

She was speaking in her role as the chair of the European Systemic Risk Board, the European Union's financial stability watchdog.

In its annual report published on Thursday, the ESRB said the EU's most indebted states could ill afford a surge in yields after borrowing massively to finance their responses to the pandemic.