ECB's Draghi warns EU leaders on raising spending

BRUSSELS (Reuters) - European Central Bank President Mario Draghi cautioned EU leaders at a summit on Thursday that European governments planning to raise spending even as growth picks up posed a medium-term risk to the economy.

Sources familiar with Draghi's regular briefing to the heads of state and government said he told them that the European economy was expanding with unchanged momentum, based on consumption. Investment, including even in housing, was growing at rates not seen since before the crash of a decade ago.

Falling private-sector debt and improving capital ratios for banks added to a positive picture, but Draghi highlighted four medium-term risks, mostly from outside the continent.

First, he noted protectionist trends in trade, on a day when the EU leaders were preparing a response to threats of tariffs from U.S. President Donald Trump. That could have a direct effect on the economy and undermine confidence, he said.

Second, he warned against a loosening of financial regulation, noting the role that played in triggering the crisis. Third, he said a repricing of assets, such as the sharp sell off in U.S. stocks at the start of the year, posed a risk to the European economy because of large transatlantic exposure.

Finally, Draghi said, fiscal policies were now "pro-cyclical", especially in the United States but also in the EU, where many states were planning to ease austerity and increase spending, even as their economies are starting to grow anyway.

(Reporting by Alastair Macdonald, editing by Robin Emmott)