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HIGHLIGHTS-ECB's Draghi at European Parliament

BRUSSELS, Oct 9 (Reuters) - European Central Bank PresidentMario Draghi testified at the European Parliament's Economic andMonetary Affairs Committee on Tuesday.

Following are highlights of his comments. ON THE EURO ZONE ECONOMY:

"Some things have improved in the last to two or threemonths, but I think the road ahead is still long and it'suphill."

"Looking ahead, we expect weak economic activity in the nearterm and only a very gradual recovery after that. The risks tothis outlook are on the downside, mainly related to the tensionsin several euro area financial markets."

ON GROWTH:

"The greatest contribution to growth in the euro area is toovercome the present state of financial and bankingfragmentation in the euro area."

ON INTEREST RATES:

"One of the sources of growth (in euro zone), not the onlyone, is that it could come from the extremely low level ofinterest rates."

ON THE ECB'S NEW OMT BOND-BUYING PROGRAMME:

"OMT interventions in government bond markets provide afully effective backstop to avoid destructive scenarios thatmight threaten price stability in the euro area.

"The ECB will conduct OMTs if and as long as countriescomply with strict and effective conditions attached to anappropriate programme via the European Financial StabilityFacility and the European Stability Mechanism.

"OMTs are ex-ante unlimited but, as I have just explained,they are not unconditional. Exit from OMTs would take place oncetheir objectives have been achieved or when there is a failureto comply with a programme."

ON THE LIMITS OF THE ECB'S ACTIVITIES:

"We should remember that the ECB cannot undertake monetaryfinancing and cannot replace what other member states should doin this. This is true for Ireland and this is also true forevery other case like this.

"It's too easy to think that the ECB can replace governmentaction or lack of it, printing money -- that's not going tohappen."

ON THE ECONOMIC IMPACT OF FISCAL CONSOLIDATION:

"It is without doubt that the process of fiscalconsolidation in the short term will depress, and has depressed,the output in different parts of the euro area.

"But what's the alternative? Let's not forget that thecrisis started from increased risk aversion, which addressedseveral problems, one of which was the unsustainability ofdeficits and debt levels."

ON THE INFLATION OUTLOOK:

"Underlying price pressures should remain moderate givenmodest economic growth and well-anchored long-term inflationexpectations. Risks to the outlook for price developments arebroadly balanced."

ON PORTUGAL:

"On Portugal, the adjustment is taking place faster than weexpected. The economy is rebalancing from purely domesticdemand-based to a more export-oriented economy. So you seecompetitiveness improving, unit labour costs going down, currentaccount deficits going down, so all these signs are signs ofprogress. Probably the deficit is expected to fall below 3percent of GDP in 2014.

"The sense is that the government is well-poised to regainmarket access within the horizon forecast.

"Like Ireland, Portugal is an example that sacrifices arenot an end (in) themselves."

ON GREECE:

"We have to wait for the Troika report in order to assesshow the situation stands."

"It's quite clear that the progress at the level ofundertaking the necessary policy reform has been perceptible andsignificant and it's also clear that more needs to be done. Wesee progress, we see a need for further work."

ON CONFIDENCE IN THE EURO ZONE:

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

ON PUBLISHING ECB MINUTES:

"Is there a case for publishing the minutes? I think again,I've said I have an open mind about that, but it's not an easything to do, you can't really do that tomorrow.

"We are not a country and therefore this ought to be takeninto account to avoid the renationalisation of monetary policy.The members of the Governing Council are there in a personalcapacity, not representing their countries.

"If we do this, we have to do it with good common sense butat the same time to be transparent. The bottom line is we arecollectively thinking about this."

SPEAKING AS HEAD OF THE EUROPEAN SYSTEMIC RISK BOARD (ESRB):

"The ESRB plans to make further proposals formacroprudential policy, particularly on vulnerabilities linkedto bank funding. The aim is to identify sources of systemic riskand policy actions to mitigate them. I intend to present theresults of this process at the next hearing in the first half of2013."

ON BANKING SUPERVISION:

"The ECB is not supposed take over supervision in threemonths' time and do it. There is a phase-in time. We foreseethat one year will be needed to adapt all the structures ...

"The important thing is that the (European) Councilregulation enters into force on Jan. 1 and then we can startofficially to work with national supervisors to put in placethis system. By and large, we give ourselves one year."

(Asked whether there is a danger that national supervisorswill act in national interest and be more lenient towardsdomestic banks): "That's a concern that needs to be addressed."

"It will be addressed through peer pressure. This system,when it will be fully operational, has to be conducive to a veryopen exchange by supervisors on the state of health of theinstitutions they supervise.

"So in this sense, there is going to be peer pressure,exchange, common decision-making and which should probablyovercome the tendency for national supervisors to take care ofnational interest."

"One of the requirements is the strict separation ofmonetary policy and supervision, so there no one who is moreattached to this."

ON RESOLUTION FRAMEWORK FOR BANKS:

"A common European resolution framework is essential forensuring the correct functioning of the banking union."

ON THE NOMINATION OF LUXEMBOURG'S YVES MERSCH TO ECB BOARD:

"In our case, especially in times of crisis, the ExecutiveBoard (of the ECB) should be completed and this nomination (ofLuxembourg's Yves Mersch) should go through."

(Reporting by Francesco Guarascio in Brussels and by SakariSuoninen and Paul Carrel in Frankfurt; Editing by CatherineEvans)

((sakari.suoninen@thomsonreuters.com)(+49 69 7565 1267)(ReutersMessaging: sakari.suoninen.thomsonreuters.com@reuters.net))

Keywords: ECB/DRAGHI