FRANKFURT (Reuters) - The euro zone economy is on the mend after a very weak end to 2011 and there have been more positive signs over the last two weeks, European Central Bank President Mario Draghi was quoted on Thursday as saying.
Draghi said inflation was well under control, and he rejected criticism of the ECB for securing better terms on its Greek government bond holdings than private holders have.
Asked if the positive signs had increased since the ECB rate-setting meeting earlier this month, Draghi told German daily Frankfurter Allgemeine Zeitung (FAZ) in an interview: "Yes, I would say so, although uncertainty remains high."
In an interview with the Wall Street Journal (WSJ) he added that despite some better signs "the recovery is proceeding very slowly and remains subject of downside risks."
The Italian also said there was no risk of the euro zone entering a Japan-style lost decade.
"What makes me confident are the reforms that have been started in Europe in the past four or five months," Draghi told the FAZ, which will publish the interview in its Friday edition.
Draghi, who took charge in November and cut rates in back-to-back meetings to kick off his presidency, said the bank's half-trillion-euro injection of 3-year funds - with more to come next week - posed no inflation risks.
"There is no sign of inflationary tendencies in the euro area, quite the opposite. And if there should be any sign of future inflation, we have the instruments with which to absorb the liquidity again within a short space of time," he told FAZ.
The ECB put no pressure on banks to buy sovereign bonds with the long-term loans it is giving them, Draghi said, adding that the central bank would prefer seeing that money flowing into the economy as credit.
Draghi also said the 17-country bloc's central bank was not planning to loosen its collateral requirements further, saying the next change in the rules is likely to be a tightening.
In December, the ECB said it would allow national central banks to take credit claims as collateral at their own risk, freeing up another 600 billion euros as guarantees for ECB loans.
The ECB bought no government bonds at all last week, halting its controversial purchase program for the first time since it restarted it last August, but Draghi said there were no plans to shut it down completely.
"The markets are still vulnerable, and so we have to be very careful about announcing the end of such an instrument," Draghi was quoted as saying in the FAZ.
The ECB has always made clear that its government bond purchases cannot replace urgently needed structural reforms in some euro zone countries, such as Italy, Spain, Portugal, Ireland and Greece.
Asked whether Europe will become less of the social model that has defined it as a result of such reforms and some harsh austerity measures, Draghi told the WSJ: "The European social model has already gone, when we see the youth unemployment rates prevailing in some countries."
Turning to Greece, which was promised a second bailout earlier this week, Draghi said that the ECB's refusal to accept losses on its Greek sovereign bond holdings would not send a wrong signal to the markets because its bond holdings are relatively small.
"The bonds were bought for monetary policy reasons," Draghi said. "There is therefore a public interest. But even more important is the fact that, in the end, it is taxpayers' money. It is our duty to protect the taxpayers' assets."
"Moreover, we are not there to contribute to government financing by dispensing with claims," he added.
The ECB has spent about 38 billion euros on buying Greek bonds on secondary market. Those bonds have a face value of about 50 billion. The ECB has agreed to pass on the profits in the next 3 years to the Greek government, but has refused to take losses similar to other investors.
He said that all the major parties have signaled approval to voluntary private sector involvement, where they would take a hit of more than 70 percent.
With regards to the second Greek bailout deal, he added in the Wall Street Journal: "I was surprised too that there was no elation after the approval of the package, and this probably means that markets want to see the implementation of the policy measures," he said.
"It's hard to say if the crisis is over," he said.
Reporting by Sakari Suoninen