Europe's Economy Still Weak: ECB's Draghi

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Economic activity in the euro area will remain weak in early 2013 before gradually recovering later in the year, European Central Bank (ECB) President Mario Draghi said on Thursday.

The euro zone economy contracted in the second and third quarters of last year, meeting the technical definition of recession, and the downturn is expected to have deepened in the fourth quarter.

"The economic weakness in the euro area is expected to prevail in the early part of 2013," Draghi told a news conference after the ECB left its main interest rate unchanged at 0.75 percent.

"Later in 2013, economic activity should gradually recover, supported by our accommodative monetary policy stance, the improvement in financial market confidence... as well as a strengthening of global demand," he said.

A sharp rise in the euro in recent weeks was a positive sign however, he said. The euro hit a 15-month peak of $1.3711 on Feb. 1. It traded below that level on Thursday but was up on the day.

"The appreciation is a sign of a return of confidence in the euro," he said. He added that exchange rates should reflect fundamentals and that the exchange rate was important for growth.

French President Francois Hollande said on Tuesday that the euro zone must develop an exchange rate policy to protect the currency from "irrational movements".

Rates Held at Record Lows

The ECB decided to leave its main interest rate at 0.75 percent. A Reuters poll of economists last week suggested it would not change rates until at least July 2014.

Despite taking no monetary policy action, the ECB and Ireland did reach a compromise on Thursday regarding a long-standing dispute over the cost of servicing money borrowed for the failed Anglo Irish bank, a source involved in the discussions told Reuters.

Dublin rushed through emergency legislation early on the day to liquidate Anglo Irish as part of a compromise to avoid paying 3.1 billion euros a year until 2023, on money it took for the stricken lender during a meltdown of the main Irish banks in 2008.

At the ECB press conference, Draghi said he "took note" of Dublin's decision, and referred reporters to the Irish government and Irish central bank for more details.

Anglo Irish was brought down by a real estate crash after a bubble inflated by cheap credit. Fearful of knock-on effects, the Irish state stepped in, landing itself with a huge debts that forced it into austerity budgets as the economy shrank and obliged it to accept a conditional bailout from the EU and IMF.

Under a plan put to Ireland's parliament, 28 billion euros ($38 billion) in promissory notes will be replaced with long-term government bonds, meaning that Ireland can make more gradual repayments.

Bank Scandal

Draghi was also questioned about how much he knew about the derivatives scandal at Siena's Monte dei Paschi bank, and what he did about it when he headed Italy's central bank from 2006 to 2011.

Italy's third largest bank has been at the center of a financial and political storm as a result of facing losses of about 1 billion euros ($1.35 billion) from a series of derivatives and structured finance trades and a 9-billion-euro ($12.1 billion) acquisition of smaller rival Antonveneta which left it badly weakened.

The ECB news conference offers reporters their first chance to quiz him directly on the scandal since his role came into focus late last month.

Draghi faced criticism then after former Italian economy minister Giulio Tremonti said it was "stupefying" that in his role as supervisor of Italy's banking system Draghi failed to discover or prevent loss-making derivatives trades at Monte Paschi.