A new study by six analysts at the European Central Bank (ECB) reveals an overlooked consequence of rising uncertainty surrounding U.S. economic policy — particularly under former President Donald Trump — which is constraining corporate financing in the euro area, slowing investment, and weakening the effectiveness of monetary policy.

According to ECB researchers Anastasia Allayioti, Giada Bozzelli, Paola Di Casola, Caterina Mendicino, Ana Skoblar, and Sofia Velasco, economic uncertainty has become a key factor shaping financial conditions. When businesses face ambiguity over fiscal, monetary, or trade policy—especially from the U.S.—they tend to adopt a “wait-and-see” stance, delaying investments. At the same time, banks become more cautious, reducing the supply of credit to manage risk.

The study finds that this combination significantly affects the European economy. Increased U.S. policy uncertainty leads to a decline in both loan demand and supply in the eurozone, which in turn limits how effectively measures like interest-rate cuts can stimulate growth.

Rising uncertainty, but calm markets

The Economic Policy Uncertainty (EPU) Index, which measures how often political and policy terms appear in major media outlets, has reached historic highs in recent years. Events such as Brexit, the COVID-19 pandemic, the war in Ukraine, and more recently, geopolitical tensions and trade policy uncertainty linked to the United States have amplified this trend on both sides of the Atlantic.

However, in contrast to past decades, financial market volatility has remained relatively subdued. Historically, high uncertainty was accompanied by sharp market swings—but recent data show the opposite: policy uncertainty is climbing even as markets remain calm. This prompted researchers to investigate whether uncertainty alone, even without market turmoil, can disrupt credit flows and investment activity.

Uncertainty tightens credit

Using data from 2003 onwards and a Vector Autoregression (VAR) model, the ECB analysts found that a shock in U.S. policy uncertainty leads to a notable reduction in credit expansion to eurozone firms, with the effect peaking around two years after the initial shock.

When this uncertainty coincides with higher market volatility, the impact is even more severe, cutting lending growth by an additional 0.3 percentage points.

Banks react by restricting credit

The study confirms that higher uncertainty directly affects bank behavior. Using detailed data from the ECB’s AnaCredit database, the researchers found that increased ambiguity around U.S. policy causes European banks to restrict new loans, regardless of corporate demand.

The effect is strongest among banks more exposed to the U.S. or to the dollar, which not only cut back on lending but also raise interest rates and shorten loan maturities. Banks with lower liquidity or higher non-performing loans react even more sharply—reducing financing by up to one percentage point more than healthier institutions.

Weaker monetary policy impact

These findings have significant implications for central banks. During periods of high uncertainty, the effectiveness of monetary policy—such as interest-rate reductions—diminishes.

For instance, when uncertainty rises, a 100-basis-point rate cut results in about 20% less impact on corporate investment, with the effect being strongest among firms that typically invest more heavily.

Looking ahead

The ECB study highlights how economic policy uncertainty—particularly from major global players like the United States—can seriously disrupt Europe’s financial dynamics, investment decisions, and policy transmission mechanisms.

As uncertainty rises, even when originating abroad, businesses slow down investment, while banks tighten credit conditions. The result, the authors conclude, is a significant weakening of central banks’ ability to stimulate growth through conventional monetary tools.