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LONDON (Reuters) - The euro zone is more stable than a year ago but economic conditions remain challenging and governments must push on with reforms and banking union plans, European Central Bank President Mario Draghi said on Thursday.
Speaking in London almost a year after he vowed to do "whatever it takes" to save the euro, Draghi said European countries should strengthen their ties and flesh out plans made last June for closer integration, including a banking union.
This would involve them sacrificing some national sovereignty on budget and structural policies.
"The answer to the crisis has not been less Europe but more Europe," Draghi said in a text of his speech on 'Building stability and sustained prosperity in Europe'.
"We can ... safely say that our Economic and Monetary Union (EMU) is a more stable union today than it was a year ago."
In a rare sortie into politics beyond the euro zone, Draghi also urged Britain to strengthen its ties with other European Union members, saying: "Europe needs a more European UK as much as the UK needs a more British Europe."
British Prime Minister David Cameron has promised to renegotiate Britain's EU role and hold a referendum on its membership before the end of 2017, provided he wins the next general election in 2015.
Draghi's speech in London last July sucked the heat out of the euro zone crisis. Markets bought his "whatever it takes" promise and were further convinced the ECB would backstop the euro when the bank subsequently presented its bond-buying plan.
The ECB's determined action had bought time for governments to consolidate their finances and banks to shore up their capital positions, Draghi said.
"Our measures gave breathing space from markets driven by panic," he added. "Today we are seeing some encouraging signs of tangible improvements in financial conditions."
He pointed to signs of slight improvement in lending in the 17-nation currency bloc, but added: "Economic conditions in the euro area remain challenging."
In a speech heavy on the merits of European integration and light on clues about the ECB's next policy moves, Draghi made no reference to comments by other ECB policymakers that the bank is looking into expanding its range of policy tools.
Instead, he pressed euro zone governments to shape up their economies.
"To maintain and expand the productive capacity of our societies, national governments need to improve the structural functioning of their respective economies," the Italian said.
He also urged them to press ahead with the banking union.
A first step in this plan involves the creation of a single bank supervisor under the ECB, due to be in place by mid-2014.
The plan envisages this being complemented by a second pillar, a 'resolution' agency and fund to close failed banks, and a third pillar - a single deposit guarantee scheme. However, differences have emerged among member states over the plan.
Draghi said it was "imperative to create a Single Resolution Mechanism."
"If we are successful in establishing an effective banking union - as I am convinced we will be - the benefits will be large, not only for euro area countries but for all EU members."
Writing by Paul Carrel in Frankfurt; editing by Ron Askew