Abstract:
The aim of this paper is to quantitatively assess the propagation of supply shocks across European regions, triggered by the COVID-19 pandemic and diffused through Global Value Chains (GVCs). By taking advantage of the cross-country variation in policy responses to the pandemic, as well as the heterogeneity in regional productive structures, we document how downstream transmission of shocks via GVC-induced backward linkages yields differences in terms of regional resilience. By combining and adapting datasets at the NUTS2 level, classifying EU regions according to the risk of falling into a development trap, and embedding inter-regional, inter-industry indicators in a regression model estimated with a local projection method, we show that regional responses of real value added to foreign (i.e., inter-country) and domestic (i.e., intra-country yet inter- and intra-regional) shocks are far from homogeneous. The nuanced picture emerging from our findings warns against withdrawing from GVCs as an attempt to insulate from foreign shocks, as this might hamper the very forces that allow dynamic regions to withstand them.
