(Adds details, background)
By Daniel Flynn and Leigh Thomas
PARIS, March 13 The euro zone economy
seems to be stabilising and inflation risks have been held at
bay, European Central Bank President Mario Draghi said on
Tuesday, urging governments and banks to use the respite to
press ahead with reform.
Draghi, who took over the reins of the ECB in November, said
the ECB's 1 trillion euros ($1.3 trillion) in long-term loans to
euro zone banks, combined with fiscal reforms by euro zone
governments, had drawn a line under the market turmoil of last
"We see continued signs of stabilisation in the euro area
economy, albeit still at a low level," Draghi told a conference
in Paris, noting that "very low short-term interest rates" and
the ECB's measures should continue to stimulate growth.
With some German central bankers raising concerns about the
possible side-effects of the ECB's massive funding injection,
Draghi stressed that there was no sign of this trickling through
into price rises.
"We are continuously alert to the risk of inflation but this
risk is not materialising at the present time," he said. "The
output gap is still quite wide in many parts of the euro zone, I
would say in the whole of the euro zone, and unemployment is
still quite high everywhere."
With small, regional banks amongst the 800 institutions
which participated in the ECB's liquidity provision last month,
Draghi said money was now closer to reaching the households and
small- and medium-sized businesses which needed it.
"Banks too should use this currently more benign environment
to strengthen their resilience further, including by retaining
earnings, cutting dividends and bonuses," he added.
"The soundness of banks' balance sheets will be a key factor
in facilitating an appropriate provision of credit to the
economy, which is their main task," Draghi said.
COMPETITIVENESS A "CONCERN"
Draghi's predecessor, Jean-Claude Trichet, warned against
complacency on Tuesday, saying it would be the "totally wrong
analysis" to think that the financial crisis had ended.
The unprecedented injection of ECB funds has been
controversial. Bundesbank chief Jens Weidmann wrote to Draghi
last month noting the risks of making it easier for banks to tap
ECB funds, though he played down their differences on Tuesday.
Draghi said he was worried about a growing competitiveness
gap between euro zone economies. Wage costs had risen 2.5 times
as quickly in euro zone countries which were running a balance
of payments deficit compared with those in surplus, he said.
"Member countries needs to repair and strengthen their
competitiveness for the sake of their own prosperity and for the
overall stability of the monetary union," he warned.
"Unless we proceed with our structural reforms all together
- and it was said several times at the beginning of the euro -
it would be difficult to keep the area together."
($1 = 0.7610 euros)
(Editing by Janet Lawrence/Ruth Pitchford)