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ECB's Draghi warns Portugal against rolling back reforms

By Axel Bugge

LISBON (Reuters) - The head of the European Central Bank told leading Portuguese decision makers on Thursday not to unravel reforms carried out during the past few years, when the country was under painful austerity during an international bailout.

Mario Draghi, speaking to members of the president's advisory council of state, said all euro members have worked to reform their economies in the past few years.

"Portugal's reform efforts were in this regard both remarkable and necessary," Draghi said in the presentation, which was made available by the ECB. "We now see clear signs that these remarkable efforts are paying off here and elsewhere."

"There is no case for unravelling past reforms," he said.

His appearance at the council meeting, the first one to be held under Portugal's new president Marcelo Rebelo de Sousa, who invited Draghi, was unprecedented and marked the first time a foreign official has appeared.

Portugal's Socialist government, which rules together with the far left Communists and Left Bloc, has begun to roll back some cost-cutting measures launched under the country's bailout, reversing wage cuts for public workers.

The government is also reversing previous public pension cuts, has reinstated four public holidays and raised the minimum wage. The original cuts had been lauded by creditors as helping to make Portugal's exports and the economy in general more competitive by reducing labour and other costs.

Draghi said that "in addition to upholding past achievements, further reform efforts are needed across the euro area".

He said that improvements in labour markets were key. "This area remains an important challenge in Portugal, as also mentioned in the 2015 country-specific recommendations."

A steady decline in Portuguese unemployment, which started in 2013 as the economy began to recover, has ground to a halt lately and jobless numbers even crept higher in recent months.

Portugal's government agreed with the European Commission in February to cut the budget deficit further than originally envisaged, partly by raising more revenues through higher indirect taxes.

But Brussels has warned it may need more measures to ensure it meets the new deficit target. The government has said it will prepare measures but does not think they will be necessary.

"We welcome the commitments of the Portuguese authorities to prepare additional measures which could be implemented when needed to ensure compliance," Draghi said.

The council's members include Prime Minister Antonio Costa, the head of the central bank, and past and present political leaders.

(Additional reporting by Maria Sheahan and Shrikesh Laxmidas; Editing by Andrei Khalip and Catherine Evans)