Macroeconomic indicators such as GDP growth, inflation and unemployment
rates have long been in the spotlight of investors, as negative news in these
areas can lead to downward risks in financial markets.
Recently, with
macroeconomic uncertainty still being in focus, policymakers’ decisions on
economic policies have taken centre stage as well. Their statements and actions
with regard to fiscal policies, as well as structural and regulatory reforms, are
affecting financial markets as seldom before. As a result, uncertainties
surrounding these policies have received growing attention.
In Europe, for
example, decisions on financial regulatory measures, structural reforms and
fiscal consolidation are important market-moving events. Moreover, the period of
broad economic policy consensus in Europe took a hit with the Brexit
referendum. In addition, increased domestic political risks due to elections in the
largest euro area countries have raised concerns about future economic
policies.1 Taking potential negative spillovers from policy uncertainty to the rest
of the economy into account,2 these uncertainties are being followed closely by
the financial sector, businesses and even by households.
Against this backdrop, we take a closer look at European economic policy
uncertainty in this paper. We start with its measurement and trends in recent
years. After that, we focus on the link and a potential decoupling of economic
policy uncertainty and financial markets uncertainty. We continue with economic
policy uncertainty transmissions between major European countries. Finally, we
discuss potential spillovers from economic policy uncertainty to bank lending. In
doing so, we focus on lending to non-financial corporations, differentiating
between large corporations and SMEs.
EU Forecast
euf:ba18.d:7/nws-01