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European Central Bank Paints Bleak Portrait of Economy

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European Central Bank Paints Bleak Portrait of Economy
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The European Central Bank painted a bleak outlook for the European economy early Thursday in a monthly bulletin. The bank forecasted a decline in inflation over the next two and a half years and expected a tepid return to growth for the 17 member states of the monetary union in 2013.

The bank's measure of inflation, the HICP, was expected Thursday to rise 2.3 percent in 2012, the same as forecast in last month's bulletin. However, the bank lowered its forecast for 2013 HICP inflation to 1.7 percent from 1.85 percent and noted that further intensification of financial market tensions could force forecasts to fall further.

Moreover, the bank lowered its GDP forecasts for both 2012 and 2013. Specifically, the bank lowered its forecast for 2012 GDP to -0.3 percent from -0.2 percent and lowered its 2013 GDP forecast to 0.6 percent from 1.0 percent.

The significant reduction in 2013 estimates is due to "tensions in some euro area sovereign debt markets and their impact on financing conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment," according to the ECB.

The report stressed the implementation and adoption of reforms agreed upon by leaders at recent European summits. The bank reiterated its stance that bond purchases should come from the joint bailout funds, the European Financial Stability Facility (EFSF) and the yet-to-be-approved European Stability Mechanism (ESM).

Yet the EFSF only has approximately 250 billion euros of remaining capital to deploy. Rumors of leveraging the EFSF six times to increase its capital have circulated, but no progress has been made on this potential leveraging.

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