UPDATE 1-ECB's Draghi- Crisis easing but outlook uncertain

Wed Aug 26, 2009 2:56pm EDT

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By Paolo Biondi

RIMINI, Italy Aug 26 (Reuters) - The global financial and economic crisis is easing but the outlook remains uncertain and economies could weaken again once public stimulus is withdrawn, European Central Bank governing council member Mario Draghi said on Wednesday.

Draghi, who heads the Financial Stability Board and is governor of Italy's central bank, said at a conference in the Italian coastal town of Rimini that recovery would be assured only when credit markets are functioning properly again.

"The economic and financial crisis that has hit the world economy over the last two years is gradually receding," Draghi said, adding that around the world there is a growing "sense that the worst is over."

However, he cautioned that "there are still strong uncertainties over the sustainability of the (positive) signals," and added that he personally did not feel confident enough even to confirm that the lowest point had been reached.

His words echo similarly cautious comments in recent days on the nascent economic recovery from other ECB officials.

This week ECB Executive Board Member Jose Manuel Gonzalez-Paramo said the situation is still "very uncertain" and Luxembourg's central bank governor, Yves Mersch, warned "the danger of a renewed downturn is not yet over."

The ECB is expected to raise its outlook for economic growth in the 16-nation bloc when it issues new staff forecasts next month. The mid-point of the bank's previous projections, in June, envisaged growth would contract by 4.6 percent this year and shrink by 0.3 percent in 2010.

Draghi said the fall in Italian industrial output probably bottomed out over the summer and the euro zone's third-largest economy could grow again, "albeit slightly" in 2010.

Gross domestic product is expected to fall around 5 percent this year, Draghi said, after contracting 1.0 percent in 2008.

The Italian government is forecasting a fall of 5.2 percent in 2009 and growth of 0.5 percent next year.

Draghi said Italian banks had a "crucial" role for the economy in coming months and, while ensuring their financial stability, they should offer "far-sighted support to productive companies which are illiquid but fundamentally solid."

He warned that Italy, which has been one of the euro zone's most sluggish economies for at least a decade, may continue to underperform its partners when the global crisis is over.

"With the crisis the structural problems of our economy have become more urgent," he said.

Amid a long list of areas of weakness he stressed in particular an education system which fails to reward merit, an inadequate welfare system and a huge wealth gap between the rich north and poor south of the country.

Draghi, who has an often strained relationship with Economy Minister Giulio Tremonti, also urged reforms to make salary negotiations more flexible, speed up the notoriously slow justice system and generally improve public services. (Reporting by Paolo Biondi, writing by Gavin Jones; Editing by Dan Grebler)

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