Local and anglosphere-based geopolitical risk and sovereign stress in the Euro Area

Abstract

Is Geopolitical Risk (GPR) detrimental to sovereign stress in the Euro Area (EA)? We address this question by estimating the dynamic effects of GPR shocks—originating either globally or in specific countries—on EA sovereign stress. Our analysis employs the local projections approach alongside the SovCISS index, which captures a broad dimension of sovereign distress. We find that neither global GPR shocks nor those originating in smaller Euro Area countries have a statistically significant impact on EA sovereign stress. In contrast, GPR shocks originating in Germany generate sizable effects, against the backdrop of the recent surge in geopolitical risk following the Russian invasion of Ukraine. Furthermore, GPR measures for Germany based on local-language newspapers produce stronger effects on EA sovereign stress than those measured by Anglosphere-based indices, underscoring the importance of how GPR is measured. Our results provide new evidence on the asymmetric responses of Euro Area-wide sovereign stress to global and country-specific GPR shocks, offering economically relevant insights for the design of targeted surveillance and stabilization policies aimed at containing spillovers and preserving sovereign debt market stability.