European Central Bank chief puts shine on 2013 forecast

The euro zone should see recovery in the second half of the year, Mario Draghi said yesterday at the World Economic Forum in Davos.

The "positive contagion" on financial markets was not yet feeding into the economy at large, but the euro zone should see recovery in the second half of the year, the European Central Bank president, Mario Draghi, said yesterday.

Speaking at the World Economic Forum in Davos, he said the central bank's loose monetary policy was helping the euro zone return to economic growth, but that much remained to be done.

"The level of economic activity is in the process of stabilising at very low levels ... We see a recovery in the second half of the year," Mr Draghi said.

"All the indices point to substantial improvement of financing conditions."

But he tempered any thoughts of normalisation, saying that the economy at large was still troubled.

"It is a situation where you have positive contagion on the financial markets and for the financial variables, but we don't see this transmitted to the real economy yet."

Even Germany, the euro zone's economic powerhouse, has seen the debt crisis bite, with first estimates of a 0.5 per cent contraction in GPD in the fourth quarter of last year.

But Mr Draghi said that this year had begun on a better note.

"All in all, the background is more favourable than it was at the same time last year."

The top objective this year was to overcome financial market fragmentation, he said.

Doubts over the health of public finances and banks in several countries have led to large differences in lending rates across the union, with healthy northern countries seeing record-low rates, while consumers in southern Europe face much higher costs.

Mr Draghi noted the positive effect of the central bank's announcement of its new outright monetary transactions (OMT) programme to buy government bonds of indebted countries. It has helped to remove the worst fears of the common currency area falling apart.

But the central bank will not be satisfied before the real economy is also aided by central bank actions, Mr Draghi added.

"At the end of July, we announced the OMT programme, which turned out to be very helpful in removing the tail risk for the euro as such," he said.

"Are we satisfied with that? I think, to say the least, the jury is still out, because all in all we have not seen equal momentum on the real side of the economy, and that's where we have to do much more."

* Reuters