Europe on right path, still fragile - ECB's Draghi

BRUSSELS Thu Mar 1, 2012 10:44pm GMT

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BRUSSELS (Reuters) - The European Central Bank is "reasonably satisfied" with its offer of half a trillion euros of cheap funds to lenders and Europe is on a fragile path to recovery, in a much healthier position than three months ago, ECB President Mario Draghi said on Thursday.

"We are reasonably satisfied with our LTRO operation," Draghi said a day after the Frankfurt-based bank provided 530 billion euros to 800 banks under its special three-year loans programme to help avoid a credit freeze.

"The target of having small and medium size banks participating in these operations has been achieved," Draghi said as he left a summit of EU leaders in Brussels.

In two such operations since December, the ECB has pumped around a trillions euro of stimulus into the euro zone financial system since, appearing to take heat out of the euro zone sovereign debt crisis, along with back-to-back rate cuts in the first two months of Draghi's ECB presidency.

Economists now expect Draghi to move into "wait-and-see" mode as the euro zone heads into a mild recession but inflation remains sticky, pushed up by oil prices, making another rate cut to boost growth soon a difficult call.

"Inflationary expectations are firmly anchored," Draghi said on the same day that the EU's statistics office Eurostat said February consumer price inflation rose to 2.7 percent, up from 2.6 percent in January but down from last year's 3 percent peak.

The European Commission sees the euro zone's economy contracting 0.3 percent this year, its second recession in just three years.

With unemployment at a euro-era high and factory managers still pessimistic about their prospects this year, the euro zone has yet to emulate the United States stronger recovery.

But Draghi defended the budget austerity that some economists blame for the deep downturn in southern Europe. He said the mix of fiscal and economic reforms governments had enacted, as well as the ECB's loan programme, were the right medicine.

"Sizeable progress has been achieved in both the structural reform area and in the fiscal reforms area, so this is positive," he said.

"It is a reassuring picture, which is still very fragile because we have a lot of uncertainty and the countries of Europe have to persevere," Draghi said. "But so far, it is a much better picture than what we had in November."

(Reporting by Robin Emmott, editing by Mike Peacock)

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