(Updates with stocks in fifth paragraph. See EXT4 for more on Europe’s debt crisis.)

Jan. 19 (Bloomberg) -- European Central Bank President Mario Draghi said 2012 will be a “much better” year for the euro area as governments push ahead with fiscal reforms and the benefits of the ECB’s flood of cheap cash become more apparent.

“I am confident that the euro will be in better shape in 2012 because I look at the progress that has been achieved on the two root causes of the situation, namely lack of fiscal discipline and lack of structural reform,” Draghi said at a press conference today in Abu Dhabi, where he was attending a central banking conference. “I see both problems being addressed with conviction, with determination and with realism in many countries in euroland.”

Investor confidence in Germany, Europe’s largest economy, jumped by a record this month after politicians pledged to implement a “fiscal compact” to restore budget discipline and the ECB flooded the banking system with a record amount of cash. Draghi said the loans had prevented a “serious funding crisis” and the benefits will become more apparent in coming months.

“We started to see the benefits of these measures,” Draghi said. “Some interbank markets are reopening” and there has been “a dramatic fall in yields” in many sovereign debt markets, he said. “We see encouraging signs.”

Stocks Rally

European stocks gained for a fourth day, extending a five- month high for the Stoxx Europe 600 Index, as Spain and France sold bonds at lower yields. The euro has risen more than two cents this week to $1.2887.

Signs of resilience in the economy give the ECB room to pause and assess the impact of its measures to date, which include cutting its benchmark interest rate to a record low of 1 percent, ongoing government bond purchases and unlimited lending to banks.

While demand for the ECB’s second batch of three-year loans may fall short of the 489 billion euros ($631 billion) allotted last month, it will “still be very high,” Draghi said. The loans will be offered on Feb. 28.

There are still “significant downside risks” to the economic outlook, Draghi said. Asked if the ECB could add to its two interest-rate cuts, he said policy makers “never pre- commit.”

Draghi also said he is “not aware” of any plan to replace the central bank’s government bond purchase program. ECB Governing Council member Ewald Nowotny told the Wall Street Journal that officials are seeking an alternative.

The bond purchases are not eternal or infinite, Draghi said.

--With assistance from Riad Hamade in Dubai. Editors: Matthew Brockett, Fergal O’Brien

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net