Euro area researchers introduce the EAGPR indicator for the euro area; GDP down 0.26% in 3 months

Geopolitical risk in the euro area: Measurement and transmissionYevheniia Bondarenko, Nayeon Kang, Vivien Lewis, Matthias Rottner, Yves Schüler

How does geopolitical risk affect the euro area economy? While existing measures of geopolitical risk are largelyUS-centric, this study introduces a new euro area-specific indicator. The findings reveal that geopolitical shocks have significant recessionary and inflationary effects in Europe, underscoring the need for region-specific tools to guide monetary policy.

Geopolitical risk(GPR)is a growing concern for policymakers, as it influences economic output, inflation, and financial stability. However, most existingGPRmeasures, such as the widely used Caldara and Iacoviello (2022) index, are based onUSand Anglosphere media sources, potentially overlooking region-specific dynamics. This paper addresses this gap by developing a Euro Area Geopolitical Risk(EAGPR)indicator tailored to capture the unique risk perceptions of European economies. The study demonstrates thatEAGPRshocks have distinct and significant economic effects, including output contraction and inflationary pressures, which are not fully captured byUS-centric measures. These findings have important implications for European central banks, particularly in assessing inflation risks and calibrating monetary policy.

From newspaper articles to the risk indicator

TheEAGPRindicator is constructed using newspaper coverage from the five largest euro area economies: Germany, France, Italy, Spain, and the Netherlands. We analyze the frequency of terms related to war, conflict, and terrorism in leading local newspapers, usingGDPweights to aggregate country-specific indices into a single euro area measure. The study employs a Bayesian Vector Autoregression model adjusted for theCOVID-19 pandemic, to estimate the economic impact ofEAGPRshocks. This approach allows for a comparison between the effects ofEAGPRand the globalGPRindex, while also accounting for structural shocks and high-frequency variations in geopolitical risk.

Different regions experience different risks

We argue that geopolitical risk is inherently region-specific, shaped by local media narratives and proximity to conflicts. While the globalGPRindex provides valuable insights, it fails to capture the euro area’s unique economic and geopolitical circumstances. For instance, theEAGPRindex responds to events like the Russo-Ukrainian War more strongly and persistently than theUS-centric measure. This divergence highlights the importance of a localized perspective in understanding the economic implications of geopolitical shocks. The study also explores two key transmission channels – sanctions and supply shortages – that amplify the economic effects of geopolitical risk in the euro area.

What happens after a geopolitical risk shock?

A one-standard-deviation shock to theEAGPRindex reduces euro areaGDPby 0.26 % within three months and increases consumer prices by 0.36 % within a year. This combination of falling output and rising inflation is consistent with the effects of adverse supply shocks, such as those caused by wars. TheUS-centricGPRindex underestimates the economic impact of geopolitical shocks on the euro area. While both indices show similar patterns, theEAGPRindex captures stronger and statistically significant effects onGDPand inflation. A “No-War” scenario, which assumes no rise in geopolitical risk following the Russo-Ukrainian War, suggests that euro areaGDPwould have been 0.8 % higher and prices 0.4 % lower by mid-2022. This highlights the substantial economic costs of geopolitical risk.

The study identifies sanctions and supply shortages as key mechanisms through which geopolitical risk affects the euro area economy. However, the direct economic impact of sanctions on the euro area is limited, while supply shortages play a more significant role in driving inflationary pressures.

This research underscores the importance of a region-specific approach to measuring and analyzing geopolitical risk. TheEAGPRindex provides a more accurate representation of the euro area’s exposure to geopolitical shocks, revealing significant recessionary and inflationary effects overlooked byUS-centric measures. These findings have critical implications for European central banks, as they suggest that inflation risks may be underestimated if geopolitical risk is assessed solely through a global lens. The study recommends incorporating theEAGPRindex into monetary policy frameworks to better account for the economic consequences of geopolitical events. Future research could further explore the role of specific transmission channels, such as energy markets and trade disruptions, in shaping the economic impact of geopolitical risk.

Bondarenko Y., N. Kang, V. Lewis, M. Rottner, Y. Schüler (2026), Geopolitical risk in the euro area: Measurement and transmission, Bundesbank Discussion Paper, No 14

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