ECB's Mersch sees signs of broad-based recovery-UPDATE 1

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Friday September 10, 2010 10:09:10 PM GMT

* ECB's Mersch says recovery nears sustainability

* Says ECB to discuss exit in December

* Liikanen says recovery continues, but risks remain

(Adds quotes, details)

LUXEMBOURG/HELSINKI, Sept 9 (Reuters) - The euro zone is on the brink of a sustainable recovery and the European Central Bank is likely to discuss removing some support measures at its December meeting, Governing Council member Yves Mersch said on Thursday.

Mersch told a Luxembourg central bank news conference that growth during the second quarter had got an important boost from domestic demand and was not only due to stock building and exports.

"It is at least a signal of having a recovery that would be more broadly based and being more broadly based, giving signs of being self-sustaining", he said.

However, Mersch said these signals stemmed from one quarter of good growth and it would not be prudent to project them into the future.

"The recovery might still give us some unpleasant surprises, ups and downs, and recovery might be uneven, not only across regions but also across sectors," he said.

"The situation remains one of caution and prudence."

A stellar German performance dragged pan-euro zone growth up in the second quarter.

Germany's economy grew 2.2 percent -- close to a startling 9 percent annualised rate -- but the OECD predicted on Thursday it would expand by just 0.7 percent in annualised terms in the third quarter. [ID:nLDE6880LL]

Others were more optimistic about Europe's largest economy.

Germany's Institute for World Economy (IfW) think tank raised its 2010 growth forecast on Thursday, saying it now expected the German economy to grow by 3.4 percent this year, up from a previous forecast for 2.1 percent made in June.

Another ECB Governing Council member, Finland's Erkki Liikanen, said the world economy continued to recover, albeit at a slowing pace, and risks remain unless countries carry out reforms to get their finances in shape.

"During summer we have seen signs from China, the United States and Japan that the pace of the growth is levelling out," Liikanen told the Finnish parliament. "According to ECB's forecast this is also expected to have happened in the euro zone." [ID:nFLA9KE694]

Thursday's OECD report forecast growth across the G7 group of major economies to average an annualised 1.4 percent in the third quarter and 1.0 percent in the fourth, down from 3.2 and 2.5 percent in the first and second quarters respectively.

DECEMBER MEET KEY

Turning to ECB policy, Mersch said the ECB had taken decisions on liquidity measures for the last quarter of 2010 and would start discussing next steps in its Dec. 2 meeting.

"It means the next rendez-vous seems to be in December concerning further information in this respect, especially information concerning the gradual phase-out of unconventional measures which has been reconfirmed as the way to go," Mersch said in comments largely similar to those of his fellow policymaker Guy Quaden earlier this week. [ID:nLDE6870TB]

"I think we have seen the first signs of slight improvement in the markets which is positive but we are not yet at a point where we can declare victory," Mersch said.

The 16-country bloc's central bank extended its unlimited 1-week, 1-month and 3-month loans last week until at least mid-January.

Liikanen and Mersch both urged agreement over Basel III banking rules soon. Mersch said the rules had to be followed by everyone, while Liikanen said the rules would not overly hurt banks' ability to lend. (Reporting by Phil Blenkinsop, writing by Sakari Suoninen, editing by Mike Peacock)

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