Draghi says euro zone faces long road to recovery

BRUSSELS, Oct 9 (Reuters) - The euro zone economy faces along, uphill road to recovery and the bloc is still sufferingfrom a crisis of confidence, European Central Bank PresidentMario Draghi said on Tuesday.

But he added that there was no alternative to continuedbudget cuts.

In testimony to the European Parliament, Draghi also saidthe ECB's new bond-purchase programme for troubled countriessuch as Spain would provide a backstop to avoid "destructivescenarios" in the 17-country euro zone.

The ECB agreed the plan last month and financial markets arenow looking for any signs Spain might make a formal aid requestthat would trigger intervention in bond markets.

Many hope that could be the beginning of the end of the mostacute phase of Europe's debt problems. But even with theprogramme, Draghi said the euro zone faced tough times ahead.

"Some things have improved in the last to two or threemonths, but I think the road ahead is still long and it'suphill," Draghi told the European Parliament's Economic andMonetary Affairs Committee.

"The crisis of confidence that has taken over the euro areain the last few months ... has improved but it's still there."

He said the euro zone economy is weak and faces theprospect of only gradual recovery, and that the budget austeritybeing brought in by euro zone governments was likely to continuedepressing growth in the near term.

"But what's the alternative?" he said. "Let's not forgetthat the crisis started from increased risk aversion, whichaddressed several problems, one of which was theunsustainability of deficits and debt levels."

The International Monetary Fund predicted on Monday that theeuro zone economy would contract 0.4 percent this year and growby just 0.2 percent in 2013. Both figures were downgrades.

Last week, Draghi said everything was in place for the ECBto buy the bonds of troubled euro zone countries and thatconditions linked to such purchases need not be punitive.

Euro zone officials meeting in Luxembourg said on Mondaythat Spain was taking steps to overhaul its economy and wasfunding itself successfully in financial markets, dashing hopesfor a swift move to end the problems of the bloc'sfourth-largest economy.

Draghi told the parliamentary committee the ECB stood readyto act.

"The ECB will conduct OMTs (bond buying) if and as long ascountries comply with strict and effective conditions attachedto an appropriate programme," he said.

(Reporting by Francesco Guarascio in Brussels, writing by PaulCarrel in Frankfurt; Editing by Jeremy Gaunt)

((paul.carrel@thomsonreuters.com)(+49 69 7565 1313))