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. Working paper behind this Blog post: https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20251128~fb427b2a3c.en.html

The transition from hyper-globalization to geoeconomic fragmentation has introduced complex externalities for the global economy. While the literature on economic statecraft typically focuses on the efficacy of sanctions against targets or the aggregate consumption costs for major powers, this paper identifies a critical structural spillover affecting "frontier" economies — third-party states physically and economically proximate to the sanctioned entity. We argue that in Eastern European economies characterized by structural duality, sanctions do not merely contract output; they induce a regressive structural shift we term "informal leakage." We develop a two-sector general equilibrium model to formalize this mechanism. The framework features a representative formal firm that aggregates capital, labor, and a composite intermediate input. The core innovation is the modeling of this intermediate input as a Constant Elasticity of Substitution (CES) aggregate of formal imported inputs (subject to sanctions) and unregulated domestic informal inputs. Theoretical analysis reveals that sanctions function effectively as a massive negative productivity shock to the formal sector. We derive a "tipping point" condition: when the elasticity of substitution between formal and informal inputs exceeds unity ($\sigma > 1$), the substitution effect dominates the scale effect. Consequently, a sanction-induced spike in import prices drives firms to substitute away from global value chains toward lower-productivity, tax-evading domestic alternatives. Calibrating the model to macroeconomic data from Central and Eastern Europe (CEE), we contrast high-exposure "Frontier" economies (e.g., the Baltic states) with lower-exposure "Control" economies (e.g., the Western Balkans). Quantitative simulations indicate that Frontier economies are paradoxically more vulnerable to this structural degradation. Despite having lower baseline levels of informality, their deep pre-war integration with Russian energy and raw material supply chains generates a steeper relative price distortion. This triggers a sharp expansion of the shadow economy, depressing aggregate total factor productivity (TFP) and creating a disproportionate "fiscal hole" as the formal tax base erodes. We validate these theoretical predictions using panel data on Value Added Tax (VAT) compliance gaps from 2018 to 2023. Difference-in-differences estimates confirm a structural reversal in tax compliance among Frontier states following the 2022 invasion of Ukraine, decoupled from standard business cycle fluctuations. The findings suggest a "geoeconomic paradox": the enforcement of sanctions can inadvertently undermine the institutional integrity of the sender’s own allies. We conclude that to preserve the rule of law and fiscal stability in the eastern periphery, the European Union requires compensatory fiscal transfers—a "Geoeconomic Resilience Fund" — to offset the asymmetric costs of collective economic defense.

While Pinker (2011) once argued that violence has declined throughout recent history, global conflicts may be coming back. Peacefulness has consistently declined worldwide, with 2022–2025 among the most violent years since the Cold War. The anticipation of threat, especially from Russia, has driven a surge in global military expenditure and pushed some countries toward near-war economies. This article analyses the rise of "peaceocracy"—"a system in which an emphasis on peace is used to prioritise stability and order to the detriment of democracy" as coined by Lynch et al (2019: 603). Peaceocracy was initially discussed in the context of Kenya, Uganda, and Ghana, but politicians elsewhere, such as US president Donald Trump and Belarus' strongman Aliaksandr Lukashenka, reframe politics as one battle after another against threats—domestic and international "others”. This article, therefore, explores how strongmen manipulate perceptions of threats, cultivating fear to undermine democratic institutions through authoritarian practices. The research looks at the case study of Aliaksandr Lukashenka’s rhetoric in Belarus from 1994 to 2025, demonstrating how he weaponised the trauma of WWII to delegitimise dissent. Lukashenka’s narrative was long criticised as manipulative but became particularly paradoxical in 2022, when his regime claimed to be a guarantor of peace while facilitating Russia’s aggression against Ukraine. Through understanding Lukashenka’s authoritarian "peaceocratic" regime, this paper argues that peace narratives may function as disciplinary measures that justify the sabotage of public voice. The presented findings warn that ongoing wars may not threaten future world peace as much as the authoritarian practices emerging to allegedly prevent these wars.