Dec. 6 - The euro zone economy is likely to shrink next year, the European Central Bank predicted on Thursday, sharply downgrading its outlook after holding interest rates at a record low 0.75 percent. Joanne Nicholson reports.
The euro zone's economy is likely to shrink next year - that's the bleak outlook from Europe's central bank. It held interest rates at 0.75%. The euro zone's benchmark rate's been at that for the past five months. The bank's President, Mario Draghi. SOUNDBITE (English) MARIO DRAGHI, ECB PRESIDENT, SAYING: "Economic weakness in the euro area is expected to extend into next year. In particular, necessary balance sheet adjustments in financial and non financial sectors, and persistent uncertainty will continue to weigh on economic activity. Draghi expects things to pick up later on in 2013, as global demand strengthens. But that will carry little weight in Greece. Students clashed with police as they marched against the government's austerity measures aimed at tackling the country's debt crisis. The financial markets have calmed since the EU and the IMF put in place further steps to help Greece, but the euro zone's economy has sunk into a recession from which it shows little sign of emerging. Investors are getting twitchy over what will happen in Spain, which needs to drive down its borrowing costs. It fell short of its targeted amount at a bond auction on Wednesday. Peter Dixon is an economist at Commerzbank. SOUNDBITE (English) PETER DIXON, COMMERZBANK, SAYING: "In the course of 2013 we can expect the ECB to respond to the problems as they arise via monetary easing. That's not going to mean interest rates. That's going to mean injections of liquidity, purchases of bonds, and who knows, sooner rather than later, perhaps, of the additional purchase of Spanish bonds once Spain signs up for an EU bailout package." The ECB has not yet bought any sovereign debt under its new programme. That will be activated when an indebted nation asks for help, and Spain hasn't. But the pressure for the ECB to intervene is building.