Climate-Induced Geopolitical Risk and Financial Interdependence in Europe: A Systemic Transition Perspective

In recent years, climate change has given cause for concern for the stability of the global economy, particularly financial stability. In this connection, its effects on the overall geopolitical set-up is also apparent. This work aims at disentangling the relationship among these three dimensions, via a streamlined set of econometric analyses. For Italy, Germany, France and Spain, the impact of extreme climate events on the geopolitical risk index is first investigated. Thus, the resulting climate-driven geopolitical risk is put in relation to each country's financial stress index. The results that emerge from the empirical analysis highlight that the geopolitical risk induced by climate events plays a significant role in the financial stability of these countries. The impact of this type of risk turns out to depend on the specific territorial characteristics of the countries, as well as the peculiar policies and targeted measures to contain adverse climate events adopted by the various countries