The costs of geopolitical risk and the impact of the EU cohesion policy

Global political and economic tensions can produce relevant consequences across Europe. This paper provides novel evidence on the costs of geopolitical risk in the European Union countries, that of a reduced effectiveness of regional policies. Using cohesion policy data for the period 2007-2020 and adopting a panel-time series heterogeneous coefficient model we show that the impact of EU cohesion funds on economic growth is reduced by about 0.45-0.55 percentage points when considering geopolitical risks. The adverse effects of geopolitical risks vary across European countries depending on specific factors like participation to global value chains and internal political risks. Our findings point out the need of coordinating different Union-wide policies to improve the effectiveness of the structural funds.