Analysis-Climate damage: the next hit to Europe’s public finances

Europe faces mounting economic strain from increasingly frequent and severe weather events, with the public purse expected to shoulder a growing share of the resulting losses. In 2024, severe flooding in Spain and Germany cost taxpayers 0.7 percentage points of output, while wildfires in southwestern Europe this year have highlighted how climate damage is becoming a regular expense rather than a one-off budget item.

Currently, only a quarter of climate-linked catastrophe losses are insured in the EU, with coverage in some countries as low as 5%. This inadequate coverage is likely to worsen as extreme weather events become more common. The European Union is set to release proposals for climate resilience and risk management this autumn, with countries like Greece and Portugal already taking steps to bolster insurance coverage and infrastructure.

However, experts warn that relying on costly catastrophe bonds or other stopgap measures may not be the best solution, as they can create perverse incentives that discourage households and businesses from obtaining insurance. Instead, governments must adopt comprehensive adaptation plans and pool risks across borders to reduce future damage and avoid the so-called adaptation investment trap.

Spanish Prime Minister Pedro Sanchez argues that green investments could prevent economic losses up to eight times their original cost. The European Central Bank has proposed a joint EU public-private reinsurance scheme, but the success of these measures will depend on political will to address the climate insurance protection gap.