European Capital Crunch

The lead article in today’s New York Times, “Crisis in Europe Tightens Credit Across the Globe,” describes the impact of the sovereign debt crisis in the Euro zone on other economies including the United States where the growth rate is estimated to slow down to 2 percent next year instead of the expected 3.1.

European banks, who hold a lot of bonds from debt-laden countries such as Italy and Spain, are starting to feel the pinch, even in Germany, an otherwise strong economy. In addition to cutting down on the number of loans, these banks are being required to hold more capital per dollar loaned, an additional restriction.

The impact has particularly affected the airline and shipping industries who need financing for new planes and vessels. Infrastructure projects are also being abandoned, and the ripple effect is reverberating around the globe. Even companies in China are affected by reduced trade with European economies.

The United States seems largely helpless to rectify the situation. We have enough economic problems of our own to worry about, and we can’t swoop in with a Marshall Plan like we did after World War II. It’s hard to see any silver lining in this situation as the extent of the crisis is just too great to lend itself to simple solutions. Maybe, we need to pray.