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ECB Unlikely To Do More For Stagnant Eurozone

On Thursday, the interest rate for Spain's benchmark 10-year bond on the secondary market â¿¿ an indicator of investor wariness of a country's economy â¿¿ was at 5.8 percent, up marginally on recent days but still way down from the unsustainable highs of 7 percent it reached in July. Meanwhile the Stoxx 50 index of leading European shares was up 148 points to 2,527.

While markets are feeling better, the outlook for the wider economy remains glum.

Budget cuts and tax increases imposed as part of austerity programs are weighing heavily on economies. The region's gross domestic product shrank 0.3 percent in the second quarter. The European Union's executive commission predicts it will shrink 0.4 percent this year, and, perhaps more alarmingly, grow only 0.1 percent all of next year. Unemployment is at 11.6 percent, highest the euro was introduced in 1999.

Five eurozone countries are in recession â¿¿ Italy, Spain Portugal, Greece and Cyprus.

In theory, a cut to interest rates would stimulate the economy by making it easier for consumers and businesses to borrow, spend and invest. Yet low ECB rates and cheap ECB credit to banks are not getting through to the wider economy in the form of more loans. That's often because businesses see no reason to borrow and expand production in a slack economy.

Draghi indicated the bond purchase plan, by lowering borrowing rates in troubled countries and easing markets, was actually doing what an interest rate cut would normally do, calling it "equivalent to a further expansion of monetary policy."

Analyst Christian Schulz said that the bond-purchase program "has a stronger easing effect than any rate cut" and that Draghi's insistence that the ECB is ready to use the program outweighs anything else the bank could do right now.

The ECB has argued that it's up to countries to push ahead with so-called structural reforms â¿¿ ones that make their economy more productive in the long term. Those typically include breaking down job protections for established workers so that companies can hire and fire more easily, and be more willing to higher younger workers. Spain and Greece have jobless rates of 54.2 percent and 55.6 percent respectively for people under 25.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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