846 million euros is an enormous amount. Yesterday, the European Commission disbursed this sum from the EU Solidarity Fund (EUSF) to Spain to support reconstruction after the flood disaster in the Valencia region in October 2024. At the time, 231 people died and the total physical damages amount to a figure between 12 and 18 billion euros. “The funding we have just approved will help rebuild what the disaster destroyed,” said President Ursula von der Leyen in a press release. “To Spain, today and tomorrow: Europa está con vosotros.”
But as these numbers show, 846 million euros at the same time represent only a drop in the ocean. Since its establishment in 2002, the EU Solidarity Fund has disbursed about 11 billion euros for 148 disasters in EU member states and candidate countries, the Commission recalls. This means that in its quarter-century existence, this EU fund has not even managed to cover the costs of a single flood.
While almost all of Europe is suffocating under a historically intense heatwave, an increasingly pressing question arises: how will we pay for the climate disasters awaiting us in the coming years, from extreme floods to extreme droughts? The answer, according to a new Bruegel analysis, is disheartening: we will not succeed, because we cannot, because there is not enough fiscal space.
“Current instruments can cover only a fraction of the damages caused by increasingly frequent and severe climate events,” warn the authors. “If nothing changes, the state will bear growing costs in its role as insurer of last resort, dedicating an ever larger share of public finances to post-disaster interventions rather than productive investments.” The report points to the growing likelihood of a “sovereign climate vicious circle.” What is this about? “Disaster losses would lead to lower economic growth and reduced tax revenues, which in turn increase debt refinancing costs,” explain the authors. “The deterioration of credit ratings and investor expectations would raise the cost of new debt financing, making proactive adaptation even more expensive.”
Last month, the German insurer Allianz mapped the financial and fiscal consequences of extreme heat for most European countries plus Japan and Canada. This scenario assumes that the five hottest years recorded in each country between 2014 and 2024 will repeat in ascending order between 2026 and 2030: the fifth hottest year in 2026, the fourth in 2027, and so on. The hottest year ever recorded in the country would repeat in 2030. The results are alarming. Total GDP losses for the period 2026–2030 could reach 5–7 percent for the most exposed countries. 211 billion euros for France, 129 billion for Italy, 115 billion for Germany, and 106 billion for Spain.
But that’s not all. Beyond 30 degrees Celsius, economic output begins to decline significantly (as anyone can confirm these days from personal experience). And this would translate into lower tax revenues for the state. “Estimated annual losses would reach 1.8 percent in France, 1.3 percent in Italy and Spain, and 0.7 percent in Germany,” conclude Allianz economists. This is even more than the annual GDP decline. This would happen “partly because progressive tax systems cause revenues to tend to decrease faster than output itself, amplifying the fiscal drag beyond the overall GDP loss.”
As if that were not enough, “simultaneously, inflation-indexed transfers, healthcare costs, and emergency infrastructure repairs increase public spending,” Allianz economists note. This would lead to a deterioration of fiscal balances in countries by about 0.5 percent of GDP annually on average. “Italy and Spain risk breaching the Maastricht deficit ceiling again when heat-related pressures are incorporated,” they warn. Conclusion: “Extreme heat is establishing itself as a structural economic risk.”
What should Europe do in the face of this looming fiscal-climate armageddon? The authors of the Bruegel study point to an important proposal that the Commission announced it will publish in the second half of this year. The “Integrated Framework for Climate Resilience and Risk Management in Europe,” which aims to help member states prevent and prepare for the increasing impacts of climate change.
The public consultation provides some clues about the Commission’s thinking on the matter. Greater use of private insurance against climate risks will certainly be a prominent feature of the proposal. “To address the growing insurance gap and improve access to affordable insurance, participants highlighted public-private risk-sharing mechanisms, risk-based pricing combined with adaptation incentives, better data and transparency on climate risk, and the development of innovative insurance products,” reads the Commission’s report on the public consultation.
The Bruegel authors agree. They emphasize that private insurance not only “limits public budget exposure to the macroeconomic effects of extreme weather events,” but “is delivered faster than government payments and incentivizes risk reduction and adaptation. Neither governments nor households can achieve this efficiency.”
Yet in Europe only about 25 percent of disaster losses are covered by insurance. In Italy it is just 3 percent. This is due to a huge moral hazard: if citizens can expect that after every major natural disaster public pressure will induce their governments to pay compensation from state coffers, the motivation to pay out of pocket for insurance is low. Bruegel economists suggest that insurance could become a prerequisite for accessing post-disaster aid. They recall that it is not possible to obtain a mortgage or a rental contract without having taken out mandatory insurance coverage.
But there is a limit to the damages that insurance can cover, warns the Allianz report. This is particularly true for extreme heat. “Insured losses remain a small fraction of total damage, reflecting a structural misalignment between what heat destroys and what conventional insurance was designed for,” they note. “Most heat damage accumulates through excess mortality, lost work hours, pressure on the healthcare system, and stress on infrastructure — channels for which indemnity contracts were not designed to handle.”
These are almost certainly costs that society will have to bear collectively, through fiscal means. But to have the necessary funds, a more risk-oriented approach to climate resilience and disaster preparedness must prevail. Flood damages in Spain in 2024, Bruegel notes, were amplified by “prolonged underinvestment in hydraulic infrastructure in Valencia.”
Ultimately, we live in a new era of increasingly extreme weather events. “What until recently was considered an exceptional event could increasingly represent a plausible baseline scenario,” warns the Bruegel report. “Climate disasters are inevitable, but the resulting fiscal crises can be avoided.”
(Excerpt from the European Morning Brief)
