ECB's Draghi sees second half euro zone recovery

DAVOS, Switzerland Fri Jan 25, 2013 5:34pm EST

1 of 2. European Central Bank (ECB) President Mario Draghi attends the annual meeting of the World Economic Forum (WEF) in Davos January 25, 2013.

Credit: Reuters/Denis Balibouse

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DAVOS, Switzerland (Reuters) - The "positive contagion" on financial markets is not yet feeding into the economy at large but the euro zone should see recovery in the second half of the year, ECB President Mario Draghi said on Friday.

Speaking at the World Economic Forum, Draghi said that the central bank's loose monetary policy was helping the euro zone return to growth, but that much remained to be done.

"The level of economic activity is in the process of stabilizing at very low levels ... We see a recovery in the second half of the year," Draghi said in Davos. "All the indices point to substantial improvement of financing conditions."

But Draghi tempered any thoughts of normalization, saying that the economy at large was still troubled.

"It is a situation where you have positive contagion on the financial markets and for the financial variables, but we don't see this transmitted to the real economy yet."

Even Germany, euro zone's economic powerhouse, has seen the debt crisis bite, with first estimates of a 0.5 percent Gross Domestic Product (GDP) contraction in the fourth quarter of last year.

However, Draghi said that this year had begun on a better note than last.

"All in all, the background is more favorable than it was at the same time last year."

For 2013, the number one objective was to overcome financial market fragmentation, the Italian said.

Doubts over the health of public finances and banks in several countries has led to large differences in lending rates across the union, with healthy northern countries seeing record-low rates while consumers in southern Europe face much higher costs.

Draghi noted the positive impact of the central bank's announcement of its new OMT program to buy government bonds of indebted countries. It has helped removed worst fears of the common currency area falling apart.

But the central bank will not be satisfied before the real economy is also aided by central bank actions, Draghi added.

"At the end of July, we announced the OMT program, which turned out to be very helpful in removing the tail risk for the euro as such," Draghi said.

"Are we satisfied with that? I think, to say the least, the jury is still out, because all in all we have not seen equal momentum on the real side of economy, and that's where we have to do much more."

(Writing by Sakari Suoninen. Editing by Jeremy Gaunt.)