From Iran to Russia to Hong Kong: Geopolitical Risks Are Weighing on the German Economy

Abstract

Over the past years, there has been an increase in global geopolitical risk, the most recent example being the intensifying conflict between the USA and Iran. Such geopolitical risks also affect the German economy. A geopolitical shock, defined as an unexpected increase in risk, has a significantly negative effect on the development of the German economy, and stock prices fall. By comparison, German industrial production reacts more strongly to an unexpected geopolitical shock than its American counterpart, while the opposite is true for stock markets. Overall, the effects are relatively moderate, but to minimize them, deeper economic and political integration is recommended.