Stability and hegemony of the Euro under rising trade uncertainties and geopolitical risks

The recent rise in geopolitical fragmentation and trade tensions has raised concerns about the resilience of the international role of the euro. Thus, this study examines how geopolitical risk shocks associated with U.S.–China trade tensions and the Russian–Ukrainian conflict influence the international hegemony of the euro as well as the institutional foundations of monetary unification in the Eurozone. The results from machine learning techniques and Bayesian model averaging show that these geopolitical tensions have weakened the international position of the euro. In addition, this study observes that the concurrent presence of the trade war and the persistence of the conflict amplifies these adverse effects on the euro. However, the findings also show that inertia in the historical use of the euro appears to mitigate the adverse impact of these shocks. Further analysis also indicates that Euro Area public debt levels and the legacy of the sovereign debt crisis act as structural constraints to the resilience of the eurozone. This study suggests that strengthening fiscal sustainability, deepening monetary and financial integration, and improving policy coordination among Eurozone members can be potent tools for enhancing the stability and international role of the euro under rising geopolitical uncertainty

This Article was written by Jamilu Iliyasu

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