Geopolitical risks and business fluctuations in Europe: A sectorial analysis

Abstract

Should Europe Really Worry about Geopolitical Risks? This study investigates the impact of geopolitical tensions and risks on the economies of the Euro area. In particular, we assess the reaction of key sectors (financial sector: stock market, exchange rate, inflation; energy sector: oil and gas; real sector: economic growth rate) with regard to geopolitical shocks over the period September 2003–March 2024. We measure the reaction of European economies to global geopolitical risks, as well as risks related to geopolitical events and threats. To this end, we adopted the ARDL model and bound tests to estimate the effects of geopolitical risks in the short and long terms. Our findings present two interesting results. First, geopolitical risks can reduce economic growth and provoke depreciation of the euro. Second, geopolitical tensions can increase inflation and put pressure on Brent oil and gas prices in Europe. The European stock market seems more resilient to geopolitical shocks, however. Finally, adverse geopolitical events are also associated with greater economic and political uncertainty in Europe.