Geoeconomic Fragmentation, Trade Reconfiguration, and Sovereign Risk: Evidence from Europe–U.S. Economic Relations (2005–2025)

This paper investigates the macro-financial implications of geoeconomic fragmentation by developing an integrated empirical framework linking fragmentation dynamics, trade reconfiguration, and sovereign risk. Using a comprehensive dataset covering the United States and Euro Area countries over the period 2005–2025, the analysis employs Structural Vector Autoregression (SVAR), panel VAR, and local projection methods to identify the causal impact of fragmentation shocks on sovereign bond yields and credit default swap (CDS) spreads. The results provide robust evidence that fragmentation significantly increases sovereign risk, with effects that are both statistically significant and persistent over medium-term horizons. The findings highlight the central role of trade reconfiguration mechanisms , including declining bilateral trade intensity, supply chain concentration, and reshoring, in transmitting fragmentation shocks to financial markets. Variance decomposition and elasticity estimates reveal that the trade channel dominates in the Euro Area , particularly in peripheral economies, while the financial channel is more pronounced in the United States , reflecting differences in economic structure and global financial integration. By establishing a unified framework linking fragmentation → trade structure → sovereign risk , this paper contributes to the literature on international trade, financial economics, and sovereign debt. The results carry important policy implications, suggesting that increasing fragmentation may raise borrowing costs and weaken fiscal sustainability, thereby posing challenges for global economic stability.