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on European Economics |
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Issue of 2026–03–30
nineteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Julián Andrada-Félix (Department of Quantitative Methods in Economics and Management, Universidad de Las Palmas de Gran Canaria, Spain.); Marta Gómez-Puig (Department of Economics and Riskcenter, Universitat de Barcelona, Spain.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid, Spain.) |
| Abstract: | Comparing the UK’s 2022 sovereign debt crisis with earlier European examples is crucial for a holistic understanding of how such crises emerge and evolve to better comprehend the warning signs of sovereign distress and the importance of coherent and credible economic governance. Both crises were marked by sudden and severe shifts in investor confidence. The UK government’s “mini budget” announcement on September 23, 2022, sent yields on UK gilts soaring at a daily rate not seen since the 1990s. Similarly, official disclosure by Papandreou’s government regarding the actual state of Greece’s public finances on October 20, 2009, caused daily sovereign debt yields in some euro area countries to rise to levels not seen since joining the euro. The primary objective of this paper is to conduct a comparative econometric analysis of the euro area sovereign bond market, with the goal of identifying past episodes similar to the turmoil experienced in the UK government bond market during September–October 2022. This comparative perspective aims to provide valuable insights for future crisis prevention in an increasingly interconnected global financial system. Specifically, we use daily data on 10-year government bond yields from January 3, 2000, to June 30, 2023, and apply both univariate and multivariate nearest neighbours’ techniques. We also introduce a novel methodology, k-Related Simultaneous Nearest Neighbours (k-RSNN), which offers significant advantages over traditional forecasting models such as ARIMA and GARCH (it enables simultaneous analysis of multiple sovereign bond markets, effectively capturing cross-country dynamics, detecting nonlinear patterns and structural breaks, and identifying past events similar to recent crises). Our results show that financial markets initially interpreted the UK bond market disruptions between October 17 and 31, 2022, as comparable to the fiscal credibility crises faced by Spain and Italy during the European sovereign debt crisis. However, after the Bank of England’s targeted intervention, perceptions of the UK’s fiscal credibility shifted toward alignment with core euro area countries. Finally, from January 16 to June 30, 2023, we find strong parallels with the sovereign-bank risk nexus that previously affected Spain and Italy during the euro area crisis. Our findings indicate that although the origins of the crisis in the UK and the euro area are different (lack of fiscal credibility and poor communication vs. solvency concerns, weak banking systems, and limitations of incomplete economic unions), examining them together offers valuable lessons: policymakers should better recognise early warning signs of sovereign distress and reinforce the importance of coherent and credible economic governance. |
| Keywords: | Financial crisis; Bond markets; Fiscal credibility; United Kingdom; Analogies; Nearest Neighbours’ Analysis. JEL classification: C22; G14; H30; H61. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202525 |
| By: | Anna Sznajderska; Andrzej Torój; Rafał Chmura |
| Abstract: | This paper focuses on the role of fiscal rules in shaping the macroeconomic effects of fiscal policy. We compare the fiscal multipliers across the European Union members and search for the drivers of their heterogeneity. To this aim we apply interacted panel vector autoregressive models to data from 27 EU countries over the period 1999-2022. Our results show that government spending multipliers are higher for countries with a relatively higher fiscal rule index compared to those with a lower index. |
| Keywords: | fiscal multipliers, fiscal rules, debt, interacted panel VAR model, European Union |
| JEL: | C33 E62 H50 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2025108 |
| By: | Reiner Martin (National Bank of Slovakia); Piroska Nagy Mohacsi (London School of Economics and Political Science); Tatiana Evdokimova (Joint Vienna Institute); Jan Klacso (National Bank of Slovakia); Olga Ponomarenko (Caplight) |
| Abstract: | Central bank communication on financial stability has been less studied than on monetary policy. Our paper aims to contribute to the growing literature in this area. Our focus is the region of Central Europe, where financial sectors are intertwined through close cross-border ownership, and about half of the countries are members of the euro area. Using large language models (LLMs) combined with country-specific contextual analysis, we study executive summaries of Financial Stability Reports (FSRs) published since the early 2000s by seven Central, Eastern, and Southeastern European (CESEE) central banks, as well as by Austria and the European Central Bank (ECB). We construct a novel financial stability sentiment index and document that central bank communication is strongly risk-focused, most notably in the case of the ECB. In addition, prior to the Global Financial Crisis, the Austrian central bank was much less concerned than other central banks in the region although Austria plays a pivotal role in the financial system in the region. Our analysis of the link between financial stability sentiment communication and macroprudential policy action highlights that many central banks actively use and communicate about borrower-based measures, while most countries activated non-zero counter-cyclical capital buffers belatedly or not at all. Finally, comparing central banks’ communication on financial stability and monetary policy, we find that euro area national central banks and the ECB’s FSR communicated about the rising risks of post-Covid inflation in a timely manner, ahead of the ECB’s monetary policy communication. |
| JEL: | C55 E58 E61 H12 D83 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1139 |
| By: | Osberghaus, Alex; Schepens, Glenn |
| Abstract: | Banks use synthetic risk transfers (SRTs) to offload potential losses in their loan portfolios to non-bank investors while retaining the loans on their balance sheets. We investigate this trillion-euro market using transaction-level data from the euro area, the largest SRT market, and highlight three channels of potential risks to financial stability. First, we show that banks synthetically transfer loans that are capital-expensive relative to their riskiness. To establish causality, we exploit a regulation that causes a jump in the risk weights of loans without affecting their riskiness. As banks redeploy the freed capital, their loan portfolios become riskier relative to their capitalization. Second, after entering an SRT, banks reduce their monitoring efforts compared to other banks lending to the same firm. The reduction in monitoring is greater the larger the share of their firm exposure that banks synthetically transfer. Third, banks and non-bank investors are interconnected. Banks are more likely to sell SRTs to investors with whom they already have credit relationship. JEL Classification: G20, G21, G28 |
| Keywords: | bank monitoring, capital regulation, financial stability, securitisation |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263210 |
| By: | Joseph Kopecky (Department of Economics, Trinity College Dublin) |
| Abstract: | As major powers deploy trade policy as coercion, what fiscal capacity does a currency union need to sustain a credible collective response? I embed the multi‐sector trade model of Caliendo and Parro (2015) into a monetary union with heterogeneous members, calibrated to the world input‐output database (WIOD) for 20 individual Eurozone members. A US tariff escalation of 20% plus EU retaliation requires 0.69% of Eurozone GDP (€97 billion); a Chinese critical minerals restriction requires 0.44% (€62 billion); both simultaneously require 1.12% (€157 billion). A substantial share of the fiscal need arises from the asymmetric costs of collective action itself: the costs that EU counter‐tariffs impose on members with concentrated trade exposures. This reframes the fiscal requirement as the price of strategic credibility. Single market deepening generates welfare gains, but barely reduces the fiscal requirement, showing that integration and fiscal capacity are complements. Joint borrowing is needed, as budget‐balanced redistribution cannot sustain collective action. However, the headline fiscal requirement is an upper bound. Embedding the model in existing EU institutions (cross‐conditionality of EU fiscal flows and qualified majority voting rules) reduces the practical requirement to 0.33% of Eurozone GDP (€46 billion) in the combined scenario, since the EU need only compensate a handful of pivotal large members to prevent a blocking minority. |
| Keywords: | Fiscal unions, currency unions, trade policy, economic coercion, Eurozone, strategic autonomy |
| JEL: | F13 F15 F42 F45 E62 H77 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0426 |
| By: | Oscar Claveria (AQR-IREA, Universitat de Barcelona, Spain.); Mihály Tamas Borsi (IQS School of Management, Universitat Ramon Llull, Spain.) |
| Abstract: | This paper examines trade relations between China and the European Union from 2000 to 2022, focusing on the role of trade policy uncertainty alongside key economic and institutional factors. Using an extended gravity model, the results show that China’s economic growth is a dominant driver of trade flows. The study introduces a novel proxy for China’s trade policy uncertainty, finding that it significantly influences bilateral trade. Results are robust to different specifications. Additionally, the results indicate that while non-eurozone EU countries demonstrate higher trade flows with China, the immediate impact of China’s Belt and Road Initiative on EU trade remains limited. Given the anticipatory nature of trade policy uncertainty and its relationship with economic growth, the findings highlight the usefulness of trade uncertainty indicators as tools for the early detection of shifts in trade patterns, offering valuable insights for policymakers to design strategies that promote greater stability and economic integration. |
| Keywords: | International Trade; Economic Growth; Uncertainty; China; European Union; Gravity Model. JEL classification: C33; F13; F14; O24. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202512 |
| By: | Sebastian Ritter (AQR-IREA Research group, Universitat de Barcelona, Spain.); Vicente Royuela (AQR-IREA Research group, Universitat de Barcelona, Spain.) |
| Abstract: | As the EU races to meet its 2030 emissions reduction target, regional disparities in transition progress threaten to leave some territories behind. We introduce the Regional Green Transition Performance Index (RGTP), a novel composite measure capturing progress across seven pillars (environmental; energy; circular economy and waste; sustainable development; just transition; innovation and policy; and transport and mobility) for 232 European NUTS2 regions over 14 years. Drawing on 31 indicators, we map spatial patterns and dynamic processes. Furthermore, we argue that the green transition acts as a structural force whose potential effects on regional development can be expressed along two axes: vulnerability and opportunity. We propose an alternative measure of Regional Green Transition Opportunity index (RGTO) which we combine with the existent Regional Green Transition Vulnerability index (RGTV) of Rodríguez-Pose & Bartalucci (2024) to construct a simple 2×2 typology of regions. We translate this evidence into a policy playbook: pair risk-mitigation with opportunity-creation and embed diffusion mechanisms so gains propagate beyond individual regions. The paper contributes an open dataset, a transparent methodology to separate performance, opportunities, and vulnerabilities which responds to the EU’s performance-based policy agenda by offering a region-level monitoring tool that complements cohesion instruments (ERDF/CF/JTF/ESF+) and flags where to reduce vulnerabilities while mobilizing opportunities in the green transition. |
| Keywords: | Green Transition; European Union; Regional Inequality; Green Transition Index. JEL classification: C43; Q56; R11; R12. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202602 |
| By: | Momo Komatsu |
| Abstract: | During the energy crisis in 2022 some Euro Area countries introduced price caps on energy, while others did not, leading to about 30 percentage points higher energy inflation in uncapped countries. This paper investigates the trade-offs policymakers face with energy price caps in a two-country currency union model with shared energy supply. The cooperative, optimal outcome is for neither country to impose a price cap, since the cap is a costly market distortion. However, capping allows a country to avoid a crisis at the cost of negative spillovers on the uncapped country, characterized by high inflation and lower output. The quantitative model with non-homothetic preferences and substitutability of energy sources shows that the cost of the price cap exceeds the cost of such spillovers, explaining why some countries capped prices while others did not. Moreover, I show that the spillovers from price caps contributed to about 10 (0.5) percentage points of energy (headline) inflation in the uncapped Euro Area countries in 2022. Targeted transfers, an alternative policy to the price cap, is a cheaper and more effective way to boost consumption of the poor without creating divergence within the union. |
| Keywords: | energy crisis; energy price cap; inflation; international spillovers |
| JEL: | E31 E63 F45 Q41 |
| Date: | 2025–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:102901 |
| By: | Konietschke, Paul; Metzler, Julian; Ponte Marques, Aurea |
| Abstract: | Conventional credit risk models understate tail risk by centering on mean default probabilities and neglecting distributional and sectoral heterogeneity. We propose a Quantile Probability of Default (QPD) framework based on unconditional quantile regressions estimated on flow default rates from five million non-financial firms across nine countries, conditioned on macro- and sectoral scenario covariates standard in stress testing. The tail exhibits three- to five-fold stronger sensitivity than at the median, revealing non-linearities and asymmetric sectoral propagation of credit risk. We validate the performance of our model across crisis periods and benchmark models to confirm the framework’s robustness and prudential efficiency. Under the European Central Banks’s 2025 increasing geopolitical and trade tensions scenario, the QPD identifies higher tail vulnerabilities in construction, trade, hospitality, and real estate. The framework embeds distributional estimation into stress testing, advancing scenario-based assessment of sectoral credit risk for policy and prudential applications. JEL Classification: C21, C54, D22, G21, G32 |
| Keywords: | firm dynamics, non-linearity, probability of default, stress testing, trade tension |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263207 |
| By: | Oscar Claveria (AQR-IREA, Universitat de Barcelona, Spain.); Petar Soric (Faculty of Economics and Business, University of Zagreb, Croatia.) |
| Abstract: | Recent energy tensions caused by conflicts in Ukraine and the Middle East have added to the pressure that global warming exerts for an energy transition towards low-carbon energy sources. This study combines two time series approaches with the aim of delving deeper into the relationship between environmental degradation and economic growth and to test the environmental Kuznets curve (EKC) hypothesis, using information from 20 European countries between 2007 and 2021. Overall, the obtained results suggest the existence of a N-shaped nexus between emissions and income per capita. Additionally, we evaluated stability of this nexus and the potential existence of an asymmetric adjustment. In most countries we find asymmetries in the adjustment of emissions to positive and negative changes in income, but not so much in economic complexity. However, notable differences are observed between countries, which could be indicating their differentiated phase in the EKC curve. |
| Keywords: | Economic Growth; Economic Complexity; Environmental Degradation; Greenhouse Gas Emissions; Europe. JEL classification: C38; C55; O44; Q20; Q50. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202519 |
| By: | Budnik, Katarzyna |
| Abstract: | This paper maps the euro-area digital-banking segment and assesses how digital banks transmit monetary policy relative to brick-and-mortar peers. I compile a hand-checked universe of over 170 digital banks (2016–2025) from supervisory data, classifying institutions by business model (e-retail, e-service, e-wholesale). Digital banks are small on average yet growing fast, rely more on household deposits—predominantly overnight—and hold larger cash buffers and intangibles than traditional banks. Using a difference-in-differences design around the ECB tightening cycle that began in July 2022 and the initial 2024 easing. Three results stand out. (i) The funding channel is stronger and faster at digital banks in tightening: household deposit rates rise more and retail-funding spreads compress less, especially at overnight maturities and for stand-alone digital banks. Corporate-funding results are directionally similar but weaker and less robust. (ii) Loan-rate pass-through is not stronger, implying margin compression and a later slowdown in lending growth at digital banks despite continued retail inflows. Household deposits are markedly more rate-sensitive than corporate or unsecured funding. (iii) In early easing, digital banks cut new funding rates relatively quickly —particularly at longer maturities — yet effective deposit premia persist and retail inflows soften while margins begin to normalise. Policy implications concern the interaction of market digital adoption and banks’ capacity to adjust balance-sheet duration through the monetary cycle, along with financial stability. JEL Classification: E52, G21, E51, E43, E58, O3 |
| Keywords: | deposit competition, deposit rate pass-through, digital banks, ECB tightening cycle, household deposits, monetary policy transmission, neobanks, overnight deposits, retail funding |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263206 |
| By: | Nicolai Suppa (Serra Húnter Fellow, Universitat de Barcelona, Spain; Center for Demographic Studies (CERCA); Equalitas; Oxford. Poverty and Human Development Initiative (OPHI), University of Oxford.) |
| Abstract: | This paper proposes a framework to analyse micro-level dynamics inherent to multidimensional poverty measures. Specifically, I use differences in deprivation transition probabilities between multidimensionally poor and non-poor people, to analyse how deprivations couple over time. Advantages of this approach include that it (i) summarises relevant mechanisms, (ii) requires only short-run panel data and (iii) is suitable for monitoring purposes. Using the European Union Statistics on Income and Living Conditions (EU-SILC) for 20+ countries over 2016–2020, I find that deprivations tend to couple over time. Implications include that coordinated policy programmes seem critical to overcome entrenched and prevent future deprivations. |
| Keywords: | Multidimensional Poverty; Poverty Dynamics; Deprivation; EU-SILC; Panel Data. JEL classification: I32, O52. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202510 |
| By: | Brunella Bruno and Immacolata Marino |
| Abstract: | We examine how banks adjust credit allocation when hidden credit risk is revealed. Using supervisory risk disclosure data from the European Central Bank’s 2014 Asset Quality Review, we find that banks experiencing larger increases in non-performing loans and provisions significantly reduce riskweighted exposures while keeping total credit volumes largely unchanged. This suggests that derisking primarily occurs through portfolio reallocation - particularly within portfolios - rather than through credit contraction. We document heterogeneous responses depending on the rating approach used to measure credit risk and we show that capital constraints amplify, but are not the sole drivers of, de-risking. Finally, we provide evidence that supervisory risk disclosure plays a key role in shaping banks’ risk-taking behavior, even in the absence of observable adjustments in their financial statements. |
| Keywords: | Transparency, Bank Supervision, Credit risk, Non-performing loans (NPLs) |
| JEL: | G21 G28 M48 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp26268 |
| By: | Hannes Swoboda |
| Abstract: | A credible EU enlargement policy remains necessary from a geopolitical perspective, but can only succeed through a more pragmatic and gradual integration approach. New members amplify the existing challenges to EU decision making, rule-of-law conditionality and political cohesion, particularly given the circumstances of Russian aggression, hybrid threats and rising nationalist and far-right forces within the Union. Against this backdrop, the highly heterogeneous situations of the Western Balkan states, Ukraine, Moldova and other candidate countries, the unresolved bilateral conflicts, domestic polarisation and relative poverty all shape public scepticism in current member states. This paper rejects ‘buffer-zone’ concepts as a form of capitulation, and instead advocates stepwise integration into the single market, Schengen and selected policies, tied to verifiable reforms, reversible conditionality, and strengthened financial and political support. Such a model would allow differentiated, reversible accession pathways, while giving the EU time to reform its own institutions and decision-making rules, ensuring that enlargement reinforces, rather than undermines, the Union’s capacity to act and its foundational values. |
| Keywords: | EU enlargement, Western Balkans, Gradual integration, Rule of law and conditionality, Russian aggression and hybrid threats |
| JEL: | F15 F55 O52 P48 K33 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:wii:pnotes:pn:106 |
| By: | Schöller, Vanessa |
| Abstract: | The smooth functioning of the repo market is essential to financial stability. However, the market has faced repeated episodes of stress in recent years. This paper examines the resilience of the euro-denominated repo market during recent episodes of elevated financial stress, drawing on transaction-level data and applying network analysis. The institutional repo network displays a core–periphery structure, with connectivity intensifying during stress periods. At the sectoral level, trading volumes and repo spreads remain broadly stable. For the euro repo market as a whole, financial stress is associated with lower spreads, consistent with the interpretation that the market functions as a shock absorber. JEL Classification: G01, G21, G23, E44 |
| Keywords: | haircuts, network analysis, non-banks, repo spreads |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263205 |
| By: | Olena Havrylchyk (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 - Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | Central Securities Depositories (CSDs) form the backbone of financial market infrastructure by registering securities, settling trades, distributing cash flows, and managing collateral. While often regarded as mere financial "plumbing, " they in fact underpin strategic objectives such as advancing the Savings and Investment Union, curbing tax evasion, and reinforcing Europe's geopolitical stance. The academic and policy debate on CSDs is fragmented across three strands of literature that rarely intersect. From a regulatory perspective, concerns focus on the persistent fragmentation of the EU CSD market. From a political economy perspective, omnibus accounts and opaque custody chains are criticized for facilitating tax evasion. From a geopolitical perspective, Euroclear – the EU's largest International CSD – has been thrust into the spotlight for its central role in immobilizing and freezing Russian assets after the 2022 invasion of Ukraine. This Paper brings these three strands of literature together to identify and analyze the key challenges facing European policymakers. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:hal-05406605 |
| By: | Francisco González Rodríguez (Alberto Orts Torres); Alberto Orts Torres (BANCO DE ESPAÑA); José María Serena Garralda (BANCO DE ESPAÑA); Miquel Tarí Sánchez (BANCO DE ESPAÑA) |
| Abstract: | This paper develops a benchmarking framework to assess the cost of issuing MREL-eligible debt, enabling structured comparisons across banks, instruments and jurisdictions. Using data on 12, 075 securities issued by 206 banks in the banking union from 2019 Q3 to 2024 Q3, we quantify how bank characteristics, macroeconomic conditions and instrument features affect issuance costs. Compared with banks with assets below €100 billion, global systemically important institutions benefit from significantly lower costs, down by 92 basis points, while other systemically important institutions and top-tier banks benefit by 88 basis points. Higher credit ratings are associated with up to an 86 basis point reduction in issuance spreads; greater efficiency, proxied by a lower cost-to-income ratio, also narrows spreads. The overnight index swap rate is the most influential macroeconomic factor, with each percentage point increase associated with a 97 basis point rise in costs. Longer maturities and greater subordination significantly increase funding costs. Lastly, we apply the model to decompose issuance costs for seven Spanish banks, identifying key cost drivers across institutions, and to simulate the impact of issuing senior non-preferred versus senior debt for four European banks near the €100 billion size threshold, documenting the implications of subordination requirements for banks’ net income. |
| Keywords: | bank resolution, bank debt, issuance cost, subordination, MREL |
| JEL: | F65 G21 G23 E43 E47 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2607e |
| By: | Alvarez Vilanova, Juan; Crescenzi, Riccardo; Mager, Lee |
| Abstract: | Foreign direct investment (FDI) finances and diffuses the capital, skills and know-how needed for the low-carbon transition, yet ‘green FDI’ remains systematically under-measured. Sector proxies – typically renewable energy and waste remediation – miss green activities embedded within other industries, yielding a partial and geographically-biased picture. Here we combine Large Language Models with the EU Taxonomy for Sustainable Activities to classify investment projects against sector-specific green criteria. Applying this taxonomy-guided framework to 109, 084 inward greenfield FDI projects into the European Union and the United Kingdom (2013– 2024), we identify 15.7% of FDI value as green – around twice the share captured by traditional measures. We show that sector metrics miss large volumes in manufacturing and services, and that beyond-energy green FDI is more strongly linked to extra-European investors, implying distinct geopolitical dependencies. Blinded human coding and robustness tests confirm high accuracy and reproducibility. Together, these results enable scalable monitoring of investment alignment with climate objectives. |
| Keywords: | green FDI; EU taxonomy; large language models; greenfield investment; decarbonisation; green transition |
| JEL: | F21 Q55 Q56 C88 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137671 |
| By: | Niccolo Marco Eugenio Consonni; Glenn Magerman |
| Abstract: | We develop a Strategic Dependency Index (SDI) to quantify the welfare cost of product-levelimport price shocks. Unlike existing empirical indicators based on concentration metrics and ad hocthresholds, the SDI is derived from a structural cost-of-living framework, and allows for additivedecomposability across products, source countries and destination countries. We apply the SDIto the EU27, and estimate trade elasticities, love-for-variety parameters, and origin-destinationspecific taste shifters using highly disaggregated 8-digit product-level trade data over 2002–2021, instrumenting for prices and expenditure shares to address endogeneity. Three sets of findingsemerge. First, the products generating the largest welfare losses are petroleum oils, liquefied naturalgas, iron ores, and selected basic metals. Their strategic relevance stems from the interaction of bothlow substitutability across sources and large expenditure shares. Second, strategic dependencyvaries sharply across EU member states even for the same product, driven by fundamentallydifferent channels — high substitution elasticities in some countries versus large expenditure sharesin others — implying that uniform EU-wide policy responses may fail to address the heterogeneoussources of vulnerability. Third, the suppliers contributing most to aggregate welfare exposuredo not coincide with the geopolitical rivals dominating policy discourse: China, the USA, andRussia do not lead the SDI ranking. The SDI provides a tractable, theory-consistent framework forevaluating targeted policy interventions aimed at reducing strategic trade exposure. |
| Keywords: | strategic trade dependence; import vulnerability; welfare costs |
| JEL: | F11 F13 F14 D12 D60 |
| Date: | 2026–03–23 |
| URL: | https://d.repec.org/n?u=RePEc:eca:wpaper:2013/404702 |