March 13, 2012 / 2:10 PM / in 6 years

UPDATE 1-Draghi sees euro zone stabilising, inflation at bay

(Adds details, background)

By Daniel Flynn and Leigh Thomas

PARIS, March 13 (Reuters) - 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 autumn.

“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.


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)

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