Geopolitical risks and the effectiveness of the EU funds: Heterogeneity in country impact

Despite geopolitical issues are becoming pervasive elements in economic decisions worldwide, current evidence is limited on the impact of geopolitical risks on the effectiveness of structural policies. This paper assembles new data on the Cohesion Policy and Next Generation funds to study the impact of geopolitical risks originating from China and the US on the effectiveness of structural policies in the European Union. The application of a heterogeneous modelling framework allows for the measurement of country-specific impact. Our results, which are robust to alternative specifications, suggest that a raise of geopolitical tensions from the US and China translates in a reduction of the effectiveness of the cohesion funds from -13 % to -30 %. The main negative impact is concentrated in export-oriented and in the Central and Eastern countries. We also document that a raise of geopolitical risks diminishes the expected returns of the NGEU funds. The policy implications of our study are finally discussed.