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Eurozone Finance Ministers Launch Bailout Fund

President of the European Central Bank Mario Draghi, left, listens to European Commissioner for Economic and Monetary Affairs Olli Rehn, during the Eurogroup meeting, in Luxembourg, October 8, 2012.

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Lisa Bryant

October 08, 2012

PARIS — Europe's new bailout fund is being unveiled as finance ministers from the 17-nation eurozone meet in Luxembourg, amid more gloomy indicators about Europe's economic health. Officially called the European Stability Mechanism, the new $653-billion rescue fund aims to offer a financial buffer for ailing eurozone economies like Greece and Spain. It follows September's announcement by the European Central Bank of a bond-buying plan to ease the longstanding eurozone debt crisis.

At a press conference last week, ECB chief Mario Draghi sounded a cautiously upbeat note about progress made by European governments to tackle their financial problems.

"You can see this progress all across the board, both as far as fiscal consolidation is concerned, as far as structural reforms are concerned," he said,"and as far as reposing some of the flaws of the banking sector."

But London-based Center for European Reform's chief economist Simon Tilford is more pessimistic.

"It is hard to be optimistic about a region as heavily indebted as Europe, or Western Europe, when the region's economy is [heading] into a very deep slump," said Tilford. "So any sort of optimism we see at the moment is likely to prove very short lived."

The new, permanent bailout fund will be used to help the most indebted eurozone economies get back on their feet in return for tough austerity measures. It is part of a larger European Union integration effort that finance ministers will discuss in their two-day meeting in Luxembourg. But while European officials hail its creation, analyst Tilford doubts whether the fund will have much effect.

"I know it sounds like a lot of money, but in the context of the eurozone economy, in the context of an economic crisis of this magnitude, these sums are really quite small," he said. "Also, the problem with this is that there are only so many countries that are able to underwrite these bailout funds, these debts."

A pensioner shouts slogans during an anti-austerity protest in front of the EU headquarters in Athens, October 8, 2012.

And as more Eurozone countries face economic problems, Tilford says, fewer are left to bail out the others.

On Tuesday, German Chancellor Angela Merkel will be in Greece, which says its coffers may soon be empty without another bailout installment. Meanwhile, reports suggest Madrid is unlikely to ask for a bailout in the immediate future. As the eurozone's fourth-largest economy, Spain is a much bigger worry than Greece.

The eurozone was hit with more bad news last week, with reports showing it had likely slipped into recession and showing August unemployment reaching a record 11.4 percent.