Geopolitical tensions such as the war in Ukraine have shaken Europe's economies. Understanding the economic impact of such shocks is crucial for monetary policy. This ECB Blog post presents a news-based indicator that tracks country-level geopolitical risk.
Geopolitical tensions around the world have increasingly affected European economies and slowed down growth. Armed conflicts and other tensions between states and political actors can disrupt supply chains, heighten uncertainty, weigh on consumer and business sentiment and fuel financial market volatility.[1] For an early assessment of the impact of the Russian invasion of Ukraine on global stock markets, see Chiţu, L., Eichler, E., McQuade, P. and Ferrari Minnesso, M. (2022), "How do markets respond to war and geopolitics?" ECB Blog, 28 September.
All of this comes at a cost for our economies, while also affecting the transmission of monetary policy. However, measuring geopolitical risk and its economic consequences is no easy task. This blog post presents a new indicator for mapping country-level geopolitical risk. The indicator is then used to measure the varying ways in which the geopolitical shock stemming from Russia's February 2022 invasion of Ukraine has affected economies across Europe.
Measuring geopolitical risk
In response to the ongoing geopolitical tensions worldwide, several new tracking tools have been put forward in various studies. One leading contribution, by Caldara and Iacoviello (2022), uses US newspaper sources to map the emergence and evolution of risks both globally and for the major economies. Yet it reflects a fundamentally US-centric perspective on the geopolitical risks affecting these countries.
Meanwhile, other approaches typically either focus only on a subset of the large EU economies or are country-specific. Until recently, no single contribution had offered comprehensive coverage of all of the EU countries based on domestic news sources. Our indicator addresses this blind spot by providing an EU-wide, domestically anchored view of geopolitical risk.
So how do we go about measuring geopolitical risk?
In line with the definition provided by Caldara and Iacoviello (2022), we understand geopolitical risk to mean "the threat, realisation, and escalation of adverse events associated with wars, terrorism, and any tensions among states and political actors that affect the peaceful course of international relations".[2] Caldara, D. and Iacoviello, M. (2022), "Measuring geopolitical risk", American Economic Review, Vol. 112, No 4, pp. 1194-1225.
We also adopt a similar text-based methodology but extend it to capture these developments from a European perspective. To this end we draw on domestic news sources for all EU countries. Specifically, we use the English-language coverage of leading EU newspapers and agencies to detect and track tensions. This yields a more granular and regionally grounded measure of geopolitical risk in Europe.
The indicator is based on a dictionary of keywords and has been constructed using an automated text search. The keywords cover a wide range of geopolitical risk-related terms. The search terms combine references to war, conflict, invasion, terrorism, military buildup and nuclear threat with words expressing tension, threat, risk or crisis. Non-geopolitical references (such as film titles, sporting events or historical anniversaries) have been systematically excluded. Thanks to this design, the indicator is able to capture how the media covers both the outbreak and the escalation of geopolitical events.
Our indicator depicts the monthly volume of articles referencing adverse geopolitical developments as a share of the total number of articles published. It shows how perceived geopolitical risk has varied across countries and over time, closely tracking the major geopolitical events in Europe over the last two decades (Chart 1). For example, before the Ukraine war central and eastern European (CEE) countries generally faced lower geopolitical risk than other EU nations. Since February 2022, however, they have been among the most affected.[3]
