- Multiple uncertainty measures (market volatility, economic/policy uncertainty, survey uncertainty) materially reduce euro area non-financial corporate credit growth, especially long-term loans.
- U.S. policy uncertainty spills over to Europe by weakening loan demand and tightening bank supply, shortening maturities and raising pricing, with larger effects at weak/liquidity-poor or high-NPL banks.
- These uncertainty shocks dampen and delay the impact of ECB rate cuts, with loan growth effects building for up to about two years.
- Despite weaker borrowing, corporate leverage has fallen since 2020 to near two-decade lows mainly via inflation-boosted GDP and deleveraging, while SMEs and externally exposed firms are hit hardest.
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The CEPR article examines how various dimensions of uncertainty—financial market volatility, economic policy uncertainty, business survey uncertainty, trade policy and geopolitical risks—affect corporate borrowing in the euro area. Using impulse response functions, it finds that some uncertainty measures (financial volatility, economic policy uncertainty, business survey uncertainty) significantly reduce credit growth, especially for non-financial corporations, while others (trade policy uncertainty, energy uncertainty) have weaker or ambiguous effects.
In parallel, the ECB’s recent research reinforces that uncertainty from U.S. economic policy has direct spillovers: euro area corporate loan growth slows, credit supply tightens, maturities shorten and loan pricing worsens following shocks in U.S. policy uncertainty. These effects build up over roughly two years and are concentrated in banks already vulnerable or with greater exposure to external shocks.
Meanwhile, corporate balance sheets have been improving. Thanks largely to high inflation increasing nominal GDP, and deleveraging via lower borrowing and repayment of existing debt, non-financial corporate debt as a share of GDP has fallen to about 72% in the EU (74% in the euro area), its lowest since 2006. Interest coverage ratios and profitability have stabilized or improved through late 2024 and early 2025, although the interest burden remains sensitive to tightening financial conditions.
Strategic implications for firms, banks, and policymakers include:
- Firms facing elevated uncertainty should prioritize liquidity, shorten maturities where possible, and be cautious about committing to long-term investments.
- Banks with weak balance sheets or high exposure to U.S. policy uncertainty should enhance provisioning, diversify exposures, and possibly raise lending standards.
- For central banks and fiscal authorities: policy predictability matters. Unclear or abrupt shifts in economic or trade policy reduce the effectiveness of rate cuts and can exacerbate investment and credit cycles.
- Policymakers should pay special attention to SMEs and firms traditionally excluded from bond markets; they are likely to bear the brunt of constrained bank credit under uncertainty.
Open questions remain:
- How will uncertainty in energy and trade policy evolve going forward, and will their impacts intensify under certain geopolitical scenarios?
- To what extent can corporate bond markets absorb displaced demand when banks tighten lending? What are the limits of substitution?
- How durable is the current leverage reduction, particularly once inflation normalizes and nominal GDP growth slows?
- What tools beyond interest rates can central banks employ to restore confidence or stabilize credit supply during uncertainty shocks?
Supporting Notes
- Financial market volatility, economic policy uncertainty, and business survey uncertainty significantly reduce non-financial corporate credit growth; trade policy and energy-related uncertainty show insignificant historical effects.
- Following a financial market volatility shock, long-term bond credit rises (peaking 3-4 quarters ahead), but short- and long-term loan credit falls—with short-term loans declining more sharply; total credit growth falls by ~0.35 pp over two years.
- After shocks in economic policy uncertainty (domestic or U.S.), euro area bank lending slows, with stronger effects for banks with limited liquidity or high NPLs; loan demand falls and supply tightens.
- A one standard deviation U.S. policy uncertainty shock reduces euro area corporate loan growth by about 0.5 percentage points two years later.
- EU aggregated non-financial corporate debt-to-GDP fell from ~86% in 2020 to ~72% in 2024 (74% in euro area), the lowest since 2006; interest coverage and profitability have begun improving as financing costs eased somewhat.