<p>We explore the impact of economic policy uncertainty (EPU) on firm performance in the European textile and clothing industry. Using a dataset of 2,129 firms from 11 European countries over the period 2013–2023, we employ system GMM estimation to investigate the effects of both domestic and global policy uncertainty on manufacturing and retail firms. The results suggest that both forms of uncertainty have a negative impact on firm performance, with domestic EPU mainly affecting retail firms and global EPU affecting manufacturing firms. We also find evidence of a nonlinear, U-shaped relationship between domestic uncertainty and firm performance, suggesting that firms may adapt to uncertainty at elevated levels. In addition, the findings highlight the role of working capital as an important buffer against uncertainty, particularly for retail firms. Overall, the study provides new insights into sector-specific vulnerabilities and suggests ways for firms to strengthen their financial resilience in an increasingly unpredictable economic environment.</p>