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HIGHLIGHTS-ECB's Draghi at European Parliament

BRUSSELS, Oct 9 (Reuters) - European Central Bank President Mario Draghi testified at the European Parliament's Economic and Monetary 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 three months, but I think the road ahead is still long and it's uphill."

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

ON GROWTH:

"The greatest contribution to growth in the euro area is to overcome the present state of financial and banking fragmentation in the euro area."

ON INTEREST RATES:

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

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

"OMT interventions in government bond markets provide a fully effective backstop to avoid destructive scenarios that might threaten price stability in the euro area.

"The ECB will conduct OMTs if and as long as countries comply with strict and effective conditions attached to an appropriate programme via the European Financial Stability Facility 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 once their objectives have been achieved or when there is a failure to comply with a programme."

ON THE LIMITS OF THE ECB'S ACTIVITIES:

"We should remember that the ECB cannot undertake monetary financing and cannot replace what other member states should do in this. This is true for Ireland and this is also true for every other case like this.

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

ON THE ECONOMIC IMPACT OF FISCAL CONSOLIDATION:

"It is without doubt that the process of fiscal consolidation 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 the crisis started from increased risk aversion, which addressed several problems, one of which was the unsustainability of deficits and debt levels."

ON THE INFLATION OUTLOOK:

"Underlying price pressures should remain moderate given modest economic growth and well-anchored long-term inflation expectations. Risks to the outlook for price developments are broadly balanced."

ON PORTUGAL:

"On Portugal, the adjustment is taking place faster than we expected. The economy is rebalancing from purely domestic demand-based to a more export-oriented economy. So you see competitiveness improving, unit labour costs going down, current account deficits going down, so all these signs are signs of progress. Probably the deficit is expected to fall below 3 percent of GDP in 2014.

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

"Like Ireland, Portugal is an example that sacrifices are not an end (in) themselves."

ON GREECE:

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

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

ON CONFIDENCE IN THE EURO ZONE:

"The crisis of confidence that has taken over the euro area in 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 easy thing to do, you can't really do that tomorrow.

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

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

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

"The ESRB plans to make further proposals for macroprudential policy, particularly on vulnerabilities linked to bank funding. The aim is to identify sources of systemic risk and policy actions to mitigate them. I intend to present the results of this process at the next hearing in the first half of 2013."

ON BANKING SUPERVISION:

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

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

(Asked whether there is a danger that national supervisors will act in national interest and be more lenient towards domestic 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 very open exchange by supervisors on the state of health of the institutions they supervise.

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

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

ON RESOLUTION FRAMEWORK FOR BANKS:

"A common European resolution framework is essential for ensuring 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 Executive Board (of the ECB) should be completed and this nomination (of Luxembourg's Yves Mersch) should go through."

(Reporting by Francesco Guarascio in Brussels and by Sakari Suoninen and Paul Carrel in Frankfurt; Editing by Catherine Evans)

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

Keywords: ECB/DRAGHI