Geopolitical Risk and the Effectiveness of the EU Funds: Sector- and Country-Evidence

Abstract

Geopolitical risk (GPR) is a pervasive element in many countries, including the European Union (EU), but evidence is limited on the influence of GPR on the effectiveness of structural policies. This paper assembles new data on the EU cohesion policy and applies a heterogeneous coefficient approach to study the impact of GPR originating from China and the US on the effectiveness of the EU structural funds for manufacturing activities. Our results, which are robust to alternative specifications, suggest that a raise of GPR translates in a reduction of the effectiveness of the EU funds. The influence of GPR differs when looking at risk originating from the US and China, and it shows country-specific patterns across Europe. We also document that a raise of GPR diminishes the expected returns of the NGEU funds across Europe up to 1% of potential growth in the industrial sector. The policy implications of our study are also discussed.

Keywords: EU funds, geopolitical risks, panel-cross section models, heterogeneity.