Geopolitical risk has become a key driver of macroeconomic fluctuations. This column analyses the macroeconomic costs of the Russo-Ukrainian war for the euro area, and the risks to further geopolitical escalation in the Middle East using a new empirical toolkit. At its core is a euro area–specific geopolitical risk indicator based on local European news sources, complemented by indicators of sanctions intensity and shortages. The evidence points to sizable output losses and inflationary pressures in 2022, and shows that the outlook remains highly sensitive to alternative geopolitical scenarios amid the current conflicts in the Middle East.

Geopolitical risk has become a key driver of macroeconomic fluctuations in the euro area, particularly since Russia’s invasion of Ukraine and, more recently, the escalation of conflicts in the Middle East. A large empirical literature studies these risks using news-based indicators, most prominently the index of Caldara and Iacoviello (2022), which aggregates newspaper coverage of wars, conflicts, and terrorism. While widely used as a global measure, this index is constructed primarily from US newspapers and may therefore not fully capture how geopolitical risks are perceived in Europe.

In recent work, we develop a euro area-specific measure of geopolitical risk (EA GPR index) based exclusively on local European newspapers (Bondarenko et al. 2026). The motivation is simple: geopolitical risk cannot be measured in a universal way. Its measurement depends on geography, economic exposure, and local narratives, all of which shape how shocks are transmitted to the economy (Sehn et al. 2022, Bondarenko et al. 2024, Clayton et al. 2026).

The resulting EA GPR index tracks major global events, but with a distinctly European profile (see Figure 1). In particular, the Russo–Ukrainian war generates both the largest spike and a persistent increase in perceived risk, with levels remaining elevated since early 2022. By contrast, the commonly used Anglosphere-based measure shows no comparable shift. More broadly, geopolitical risk in Europe has diverged markedly from standard measures since 2022, reflecting the region’s greater exposure to nearby conflicts.

Figure 1 Euro area Geopolitical Risk Index (EA GPR)

Notes: The euro area GPR index is based on local newspapers from euro area countries. It is normalised to equal 1 in January 2010.

This pattern is robust across alternative constructions, including a daily version and a broader EU index, which are publicly available as part of a consistent toolkit for tracking geopolitical risk from a European perspective. Together, these indicators highlight that local risk perceptions respond more strongly and more persistently to conflicts in the neighbourhood.

Sizeable decline in output and higher inflation due to the Russo–Ukrainian war

To quantify the macroeconomic effects of geopolitical risk, we estimate a Bayesian vector autoregression for the euro area and adjust it for the COVID-19 period. This allows us to analyse a long pre-pandemic sample together with recent geopolitical events, including the Russo-Ukrainian war, within a consistent framework.

We find that geopolitical risk shocks have clear stagflationary effects in the euro area: economic activity declines, inflation rises, and monetary policy tightens in response, consistent with geopolitical risk acting as an adverse supply shock (Verduzco-Bustos and Zanetti 2026).

We use this framework to quantify the macroeconomic costs of Russia’s full-scale invasion of Ukraine through a counterfactual ‘no war’ scenario, in which geopolitical risk is held at its pre-war level. The results indicate that euro area industrial production would have been around 1.3% higher and prices around 0.6% lower by mid-2022 in the absence of the sharp increase in geopolitical risk following the invasion (see Figure 2).

Figure 2 War vs. ‘no-war’ path difference

Notes: Figures show the deviation of the actual data minus the counterfactual data. Shaded areas denote the 68% credible intervals.

These are economically meaningful effects. A 1.3% level loss in industrial production is large relative to the actual year‑on‑year growth observed in 2022, and the inflation impact is non‑trivial given the already elevated inflation environment.

Euro area outlook remains sensitive to future developments of geopolitical risk

At the current juncture in March 2026, our euro area GPR index has risen sharply amid the recent conflicts in the Middle East. To assess the implications for the near-term outlook, we consider alternative scenarios that differ in how geopolitical risk evolves over the coming months.

In a baseline scenario of gradual de-escalation (not shown), geopolitical risk declines steadily from its current elevated level. Figure 3 reports deviations from this baseline for two alternatives: one in which geopolitical risk remains persistently high (‘escalation’), and one in which it quickly returns to historically normal levels (‘fast de-escalation’).

Figure 3 Alternative geopolitical risk scenarios (deviations from baseline)

Notes: The figure shows deviations from a baseline scenario of gradual de-escalation (not shown), in which geopolitical risk declines steadily from its March 2026 level. The ‘escalation’ scenario assumes that geopolitical risk remains elevated, while the ‘fast de-escalation’ scenario assumes an immediate return to historical norms.

The differences are substantial even over a short horizon. Under escalation, industrial production is about 0.7% lower and consumer prices about 0.3% higher relative to the baseline. Under fast de-escalation, industrial production is about 0.7% higher and prices about 0.5% lower.

These results show that the euro area outlook is highly sensitive to the future path of geopolitical risk, with meaningful effects on both activity and inflation emerging within a few months.

Channels of transmission

Both our backward-looking estimates and forward-looking scenarios show that the euro area economy is highly sensitive to developments in geopolitical risk. To understand why, we draw on our additional news-based indicators that capture two key channels: shortages — such as disruptions in energy and input supply — and sanctions intensity. The evidence points to shortages as an important driver of inflationary pressures, while sanctions play a more limited role at the aggregate level. This is in line with evidence that sanctions impose much larger costs on target countries than on senders (Lewis and Puangjit 2026).

Conclusion

Our results highlight three broad lessons. First, measuring geopolitical risk through a regional lens is crucial. Standard global indicators may understate both the level and the macroeconomic impact of geopolitical risk in the euro area.

Second, recent geopolitical shocks have had economically meaningful effects. The Russo-Ukrainian War alone generated sizeable output losses and inflationary pressures, and our structural scenario analysis shows that the near-term outlook remains highly sensitive to further developments in geopolitical risk.

Third, our results indicate that shortages play an important role in transmitting GPR shocks to prices in the euro area, whereas sanctions appear to not materially alter the overall propagation of these shocks.

Taken together, these findings suggest that strengthening economic resilience to supply disruptions and closely monitoring geopolitical developments will remain key challenges for policymakers in the period ahead. 

Source : VOXeu