Geopolitical shocks and household financial distress in Europe: The Russia–Ukraine war

Abstract

This paper examines the impact of a major geopolitical risk shock, comparable in scale to the outbreak of the Russia–Ukraine war, on household financial distress in five European countries. We combine a VAR, household survey data, and theoretical insights to develop macro–micro simulations that quantify how such shocks influence household balance sheets. The VAR traces the macroeconomic effects of a surge in geopolitical risk, which we apply to household-level data using the HFCS. We find the shock is associated with elevated inflation, tighter monetary policy, higher mortgage rates, and falling house prices. Our simulations show these dynamics significantly increase financial distress, with variation across countries. We incorporate endogenous consumption responses and show that adjustments driven by interest rate exposure, inflation, and housing wealth play a key role in shaping household resilience. We also document that younger and lower-income households tend to increase consumption following the shock, exacerbating their financial vulnerability.