The Pressure Is on: How Geopolitical Tensions Impact Institutional Fiscal and External Stability Responses

ABSTRACT We examine how geopolitical risks (GPR) affect fiscal (FS) and external sustainability (ES) across 27 European Union economies over 2001Q4–2022Q3. We apply a two‐step strategy: first, estimating time‐varying FS and ES coefficients using Schlicht's (2021) approach; second, analyzing their response to geopolitical risks through a panel framework with bootstrapped inference. Our results show that higher GPR systematically weakens both fiscal and external sustainability, with the effects on ES between three and six times larger than those on FS. Domestic risks exert stronger pressures than global ones, while spillovers from neighboring‐country GPR further amplify external imbalances, underscoring the interconnectedness of EU economies. The analysis also reveals structural shifts around major crises—including the global financial crisis, the European sovereign debt crisis, and the Russia‐Ukraine war—that mark turning points in sustainability dynamics. These findings highlight the importance of maintaining fiscal buffers, diversifying trade, and enhancing regional coordination to mitigate the destabilizing effects of geopolitical tensions.