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Uncertainty in Washington is spilling over across the Atlantic — and Europe’s economy is paying the price.
A European Central Bank blog post published on Tuesday warned that rising uncertainty about US economic policy — debates in Washington over tariffs, debt-ceiling showdowns, or sudden changes to rules for banks or businesses — slows lending and investment in the euro area.
The post, co-authored by Anastasia Allayioti, an economist in the ECB’s Monetary Policy Strategy Division, Caterina Mendicino, an advisor in the ECB’s Monetary Analysis Division, and several colleagues, used euro-area data going back to 2003 and a statistical model that tracks how shocks spread through the economy.
They found that a rise in US policy uncertainty reduces euro-area loan growth by around 0.5 percentage points within two years.
The effect is even stronger when financial markets are volatile, adding another 0.3 percentage points to the slowdown.
Banks with weaker balance sheets cut back the most
Looking at bank-level data since 2007, the study shows that lenders with less liquidity or more bad loans cut back more aggressively — shrinking credit growth by about 1 percentage point more than healthier banks.
Institutions with greater exposure to the US dollar also raised interest rates and shortened loan maturities.
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The drag is also clear at the company level.
Using firm data since 2013, the authors find that when US policy uncertainty is high, the impact of an ECB rate cut on business investment falls by about 20%.
The effect is most severe for investment-heavy companies and firms with strong trade links to the United States.
Uncertainty blunts the power of rate cuts
The problem for Europe is that uncertainty freezes decision-making at companies and banks and makes European Central Bank policy less effective.
Rate cuts that normally spur investment deliver weaker results, meaning the ECB has to act more forcefully to achieve the same effect.
As the authors put it, US policy uncertainty “can significantly influence credit dynamics, business investment, and the effectiveness of monetary policy in the euro area.”
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