How US Policy Uncetainy is Quietly Dragging Down European Growth

Uncetainty in Washington is spilling over 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 Banks or Businesses-Sows Lending and Investment in the Euro Area.

The post, co-authored by Anastasia allayioti, an economist in the economic policy strategy division, caterina mendicino, an advisor in the ecb’s monetary Analysis Division, and Several Colleagues, Used Euro-Aa Data Go Back to 2003 and A Statistical Model that tracks shocks. Economy.

They found that a rise in us policy uncetainty Reductions Euro-Earea Loan Growth by Around 0.5 Percentage Points with 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 Date Since 2007, The Study Shows that bows with Liquidity or More Bad Loans Cut Back More Aggrasivly-Shrinking Credit Growth by About 1 Percentage Point More than Healthier Banks.

Institutions with Greater Exps to the US Dollar Also Raised Interest Rates and Shortened Loan Maturities.

The Drag is Also Clear at the Company Level.

USING FIRM DATE SINCE 2013, The Authers Find That Wen US Policy Uncetainty is High, The Impact of an ECB Rate 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.

Uncetainty Blunts The Power of Rate Cuts

The problem for Europe is that uncetainty freezes decision-making at Companies and Banks and Makes European Central Bank Policy Less Effective.

Rate cuts that normal spur investment deliver weaker results, meaning the ECB has to act more forcefully to Achieve the Same Effect.

As the author Put it, the US policy uncetainty “Can Significantly Impact Credit Dynamics, Business Investment, and the Effectiveness of Monetary Policy in the Euro Area.”