By Tom Fairless 

FRANKFURT -- European Central Bank President Christine Lagarde said the eurozone economy is rebounding strongly but faces a highly uncertain outlook, as the bank left its large monetary stimulus unchanged.

At a news conference, Ms. Lagarde indicated that the ECB would continue to provide strong support for the region's governments, businesses and households as they emerge from lengthy lockdowns. She urged European Union leaders meeting this weekend to thrash out a deal on a controversial multibillion euro recovery fund that could remove some of the crisis-fighting burden from the ECB.

Europe was hit early and hard by the coronavirus pandemic, but muscular intervention by governments and the ECB have so far helped to curb infection rates and support consumer spending and growth. The ECB alone unveiled around $3 trillion of stimulus measures in recent months, putting its crisis response on par with the Federal Reserve's.

"We are in a good place at the moment," Ms. Lagarde told reporters, pointing to a significant economic rebound in May and June from April's low, as governments across Europe eased lockdown measures.

Still, she warned that job and income losses, together with exceptionally high uncertainty, would weigh on consumer spending and business investment. The rise in infections in the U.S. is a major concern, she said.

The ECB said in a statement Thursday that it would continue to purchase EUR1.35 trillion ($1.54 trillion) of government and corporate debt through June 2021 under its Pandemic Emergency Purchase Program, or PEPP. The bank also left its key interest rate unchanged at minus 0.5%.

A key challenge for Ms. Lagarde, a former International Monetary Fund managing director and French finance minister, is to steer the region's economy out of its deepest crisis in decades, just as a faster rebound in Northern Europe triggers calls for an early end to easy money.

Europe's recovery is expected to be uneven, tilted toward the richer North, and it depends heavily on costly government support and a rebound in exports. The latter seems unlikely as key trading partners like the U.S. continue to struggle with surging coronavirus infections.

The economies of Italy, France and Spain are expected to shrink around 11% this year, roughly twice as much as Germany's, the European Commission, the EU's executive arm, wrote in a report this month. Italy's public debt is expected to rise above 150% of economic output this year, more than double the level in Germany, according to the International Monetary Fund.

To keep government and corporate borrowing costs in check, the ECB has been buying roughly EUR150 billion of eurozone debt a month since launching its new bond-buying program in March.

Ms. Lagarde signaled Thursday that the ECB would probably spend the entire EUR1.35 trillion package, quashing suggestions from some ECB officials that the program could be scaled down.

Some ECB officials have started to worry publicly in recent weeks that the bank's massive stimulus, billed as a temporary response to the pandemic, could drag on for years. Jens Weidmann, president of Germany's conservative Bundesbank, has said that Germany's economy is recovering, while arguing that the ECB's stimulus should be withdrawn as the pandemic recedes.

The trouble is, the ECB probably can't step back from government bond markets without driving up borrowing costs for weaker countries like Italy, threatening a repeat of the region's sovereign-debt crisis.

"A marked reduction in purchases could put pressure on the bonds of the highly indebted southern member states," said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. "The ECB would want to prevent this at all costs."

Indeed, many analysts expect the ECB to go further and expand its stimulus again later this year. Besides supporting governments, that could help to avert a dangerous drop in inflation, which the ECB aims to keep just below 2%. Eurozone inflation was just 0.3% in June.

EU governments could help out the ECB if they strike a deal at their summit meeting on Friday and Saturday. France and Germany have pushed for a EUR750 billion recovery fund, but some frugal northern European governments want the EU to do less, and to tie disbursements to economic reforms -- something that is anathema for governments in the South.

Ms. Lagarde wished EU leaders "luck, determination and a spirit of cooperation" and said they were carrying a lot of hopes. Investors and analysts are cautious, however, worrying that any new funds will probably be disbursed over many years and have little impact on reducing debt.

"Radical policy action has reduced the risk of a debt crisis for now, but only thanks to measures which are supposed to be temporary," said Andrew Kenningham, chief Europe economist with Capital Economics in London.

"Many things still need to go right if Italy is to avoid having to restructure its public debt within the coming decade or so, and that would again raise fears of a eurozone breakup."

Paul Hannon in London contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

July 16, 2020 13:05 ET (17:05 GMT)