A joint report by the European Central Bank and the European Systemic Risk Board, published on 22 January 2026, argues that geoeconomic fragmentation and geopolitical risk are now among the main sources of macro-financial uncertainty facing the euro area and the wider EU.
The report sets out how shocks linked to conflict, sanctions, trade policy and political instability can transmit into tighter financing conditions, higher risk premia and weaker growth, and proposes a framework for monitoring these risks using a set of geopolitical indicators.
The ECB and ESRB define the problem broadly. Fragmentation is treated as a mix of abrupt shocks and slow-moving trends: sudden events such as the outbreak of war, and longer shifts such as prolonged non-cooperation, sanctions and regulatory divergence. The report groups geopolitical risks into five categories: military conflict and war; infrastructure vulnerabilities (including energy and digital systems); trade disruptions and sanctions; capital and financial risks; and political or societal factors. It also distinguishes between three transmission channels—financial, real-economy and operational—while focusing most of its analysis on the financial channel, where spillbacks materialise through tighter conditions, higher premia and market stress.
To make the risk discussion operational, the report proposes a monitoring toolkit based on 40 geopolitical indicators spanning the five categories. These include high-frequency market-based measures alongside slower-moving cyclical and structural metrics. The authors describe a “geopolitical indicators heatmap” designed to sit alongside existing financial stability dashboards, allowing authorities to track shifts in the risk environment and relate them to changes in macro-financial conditions.
On the state of play, the report says geopolitical risks and policy uncertainty have risen markedly since the mid-2010s, with notable increases in 2024 and 2025. It links this to a sharp rise in global economic and trade policy uncertainty and notes a 27 per cent increase in trade disputes at the World Trade Organization between 2015 and 2024, alongside growing regulatory divergence. At the same time, it identifies what it calls a “dichotomy”: model-based results point to sizeable downside risks for the real economy, but financial market volatility has tended to be contained or short-lived after spikes.
A central part of the report’s analysis is the effect of geopolitical risk on “tail” outcomes—large, adverse moves that matter for financial stability. Using growth-at-risk approaches, it finds that adding geopolitical indicators lowers expected growth compared with models that exclude them, and that since 2014 geopolitical indicators have increasingly acted as a drag on growth-at-risk, reducing it by one to two percentage points. On the financial side, higher geopolitical shocks and policy uncertainty are associated with higher systemic stress, weaker loan growth and tighter lending conditions, implying material downside risks for the economy and the financial system.
The report also stresses differences across Member States. Its estimates suggest the impact of geopolitical shocks is heterogeneous, with more open economies and those with higher public debt ratios tending to be more vulnerable to amplification effects. The authors add that geopolitical risk can reduce financial integration and economic synchronisation within the euro area, potentially worsening output losses and financial stress beyond the direct effect of the original shock.
Financial markets are presented as both a transmission mechanism and a source of signal. The report finds that volatility spillovers between asset classes—bonds, commodities, equities and exchange rates—spiked during episodes such as the Covid-19 period and Russia’s invasion of Ukraine in 2022, with shocks disrupting established cross-market relationships. It also analyses US political risk using prediction-market data and reports spillovers into euro area equities from tariff-related political risk shocks.
At the level of institutions, the report says banks and non-banks adjust balance sheets in response to geopolitical shocks by reducing lending, particularly cross-border exposures. In the executive summary, it reports that euro area banks cut the probability of new lending relationships by around 6 per cent and reduced average loan amounts by 9 per cent, with stronger effects among banks with less capital headroom or larger exposures to higher-risk countries. It also points to declines in market-based funding in response to elevated policy uncertainty and geopolitical risk, especially in foreign-currency funding.
The ECB and ESRB conclude that the monitoring effort is constrained by data limitations, including uneven availability and comparability of indicators over time and across countries. They call for more harmonised datasets and the use of complementary scenario analysis and stress testing to support macroprudential decisions. On the same day, ECB Banking Supervision set out supervisory priorities for 2026–28, including a focus on banks’ resilience to geopolitical risk and a 2026 thematic reverse stress test in which banks define their own geopolitical scenarios.
