As much as the U.S. economy has taken a hit from overindebted consumers winding down their credit-fueled binges, Europe's own mountain of debt could cause the recession to linger longer there than in America. Just like the U.S., Europe faces a consumer-loan crisis, with up to $175 billion in consumer-debt defaults over the course of the downturn. On top of that, European companies--traditionally reliant on house banks for financing--are having a much harder time than their U.S. competitors at finding the capital they need. In the euro zone, where companies are most reliant on bank loans, credit flows turned negative this year as banks tightened lending and cleaned up their balance sheets. In June alone, banks lent non-financial-sector firms $49 billion less than they took in from them in repayments, the biggest such decline on record.
While finance ministers are lashing out at banks for restricting credit, a report by Deutsche Bank fingers a different problem: European firms are still weighed down by the massive debt they acquired during the boom years. At the recession's outset, euro-zone nonfinancial companies owed debt worth 100 percent of GDP, compared with 50 percent of GDP in the U.S. That doesn't even include the financial sector, where European banks were also more leveraged than their U.S. competitors. All this debt will weigh more heavily on European firms than U.S. ones, says Deutsche Bank's Gilles Moec. Companies forced to deleverage and pay off debt could have trouble raising capital to invest and stay competitive, while squeezing jobs and wages. Not a good recipe for a strong recovery.