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Filippo Bontadini

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Valentina Meliciani

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Maria Savona

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Ariel Wirkierman

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Bontadini, F; Meliciani, V; Savona, M; Wirkierman, A (2025) European regional resilience to supply shocks diffused through Global Value Chains, Centre for Inclusive Trade Policy, Working Paper 028

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.

Non Technical Summary

Recent years have exposed the European economy to a sequence of concurrent crises—ranging from the COVID-19 pandemic to geopolitical tensions, supply disruptions, and climate-related risks. These shocks have highlighted the deep interconnectedness of European regions through global value chains (GVCs). This paper asks a crucial policy question: How do global supply shocks affect European regions differently, and what makes some regions more resilient than others?

Using the COVID-19 pandemic as a real-world stress test, the study examines how supply disruptions originating abroad spread through global and domestic production networks and how they ultimately affected regional economic activity across Europe. Importantly, the analysis moves beyond national averages and focuses on regional outcomes, recognising that European regions differ widely in their economic structures, capabilities, and degree of integration into global markets.

A central insight of the paper is that exposure to global shocks via high integration in global value chains is not, by itself, a weakness. While highly connected regions experienced sharper initial disruptions during the pandemic, many of them also recovered more quickly. Their ability to rebound was linked to strong local capabilities: Diversified production structures, higher technological intensity, and capacity to adapt when supply links were interrupted. In these regions, global integration went hand-in-hand with resilience.

By contrast, regions with weaker economic foundations—particularly those at risk of falling into a “development trap”—fared much worse. These regions are typically characterised by lower productivity growth, limited technological upgrading, and a reliance on labour-intensive activities. Although they were initially less exposed to foreign shocks because of their weaker global integration, this insulation did not translate into better long-term outcomes. Instead, their limited economic dynamism meant that domestic shocks had persistent negative effects, and recovery was slow or incomplete. In other words, avoiding exposure did not guarantee resilience.

The evidence suggests that resilience is less about retreating from global connections and more about building the internal capacities that allow regions to adjust when shocks occur. Regions that combined global openness with strong local capabilities followed a “pain shared is pain reduced” dynamic: Although shocks were transmitted quickly through global networks, recovery was also faster because adjustment mechanisms were already in place.

These results carry important implications for current debates on European industrial policy and strategic autonomy. There is growing pressure to re-shore or near-shore production and reduce dependence on foreign suppliers in the name of security and resilience. While these strategies may reduce exposure in specific sectors, the paper warns that a broad withdrawal from global value chains risks undermining the very forces that support long-term regional resilience. In particular, policies that prioritise insulation over capability-building may leave weaker regions even more vulnerable to future shocks.

Instead, the findings point to an alternative policy direction. Strengthening regional resilience requires sustained investment in economic dynamism, including skills, innovation, and technological upgrading. Diversifying supply bases—rather than simply shortening them—and reinforcing intra-regional capabilities can help regions respond more effectively to disruptions without sacrificing the benefits of openness. Place-based policies that recognise different regional starting points are especially important, as one-size-fits-all approaches are unlikely to address Europe’s deep-seated regional inequalities.

Overall, the paper shows that resilience in the face of global shocks is fundamentally a question of capabilities rather than exposure. Europe’s challenge is not simply how to shield regions from global shocks and disengage from global value chains, but how to ensure that all regions have the capacity to adapt when those shocks inevitably occur. Strategies focused narrowly on reshoring or reducing international linkages risk overlooking the deeper sources of vulnerability. Instead, strengthening resilience requires sustained investment in innovation, skills, and diversification—especially in lagging regions—so that all parts of Europe can participate in global value chains in ways that support long-term development and stability.