Geopolitical Risk in the Euro Area: Measurement and Transmission

This technical report presents a new measure of geopolitical risk (GPR) specifically tailored for the euro area, developed by authors from the Deutsche Bundesbank and the Bank for International Settlements. The report introduces the euro area geopolitical risk index, which utilizes local European news sources to capture the unique economic implications of geopolitical events, particularly in light of the war in Ukraine. The authors argue that existing GPR measures, predominantly based on US perspectives, fail to accurately reflect the euro area's economic responses to geopolitical shocks. The report details the significant recessionary and inflationary effects of geopolitical risk on the euro area economy, estimating substantial output losses and inflationary pressures due to the Ukraine conflict. Furthermore, it discusses the sensitivity of euro area economic prospects to future geopolitical developments and highlights the role of sanctions and shortages as transmission channels for these risks. The findings emphasize the importance of a localized approach to understanding geopolitical risk in economic analysis.