Increasingly frequent and unpredictable extreme weather events in Europe are putting pressure on public budgets, as much of the economic damage from climate disasters is uninsured. According to Reuters, recent forest fires and major floods demonstrate that climate damages can no longer be viewed as one-off budgetary shocks. Federico Bariga-Salasari, head of sovereign ratings at Fitch for Western Europe, states that such disasters are becoming recurrent, forcing governments to make more complex choices between different spending directions.
The European Environment Agency estimates that from 1980 to 2024, extreme weather and climate events have caused economic damage of €822 billion ($953 billion) in the European Union, with a quarter of that occurring in just the last four years. Meanwhile, average public deficits in the eurozone are already around 3% of GDP. In Spain, the costs of recovery from major floods in 2024 are estimated to be around 0.7 percentage points of GDP from 2024 to 2026.
The issue is exacerbated by the low level of insurance coverage. The EU estimates that only about a quarter of the damages from climate disasters are insured, with some countries not even reaching 5%. According to David Zani of Franklin Templeton, with the rise of climate risks, some damages may become more difficult to insure, creating a burden equivalent to 1-2% of GDP for individual countries. For instance, after the floods in Germany in 2021, the country had to allocate around €30 billion in public funds to compensate for most of the damages.
EU countries are discussing various mechanisms for risk distribution and expanding insurance systems. Greece is trying to increase insurance coverage and strengthen the water and energy infrastructure of tourist centers, while Portugal has announced plans to implement a mandatory housing insurance system following the major floods in 2026. Catastrophic bonds are also being discussed, although they can be an expensive tool for states. Bruegel experts emphasize that governments need to transition from one-time emergency expenditures to systemic solutions that encourage insurance and climate adaptation.
Various studies show that early investments in climate resilience can significantly reduce future damages and the growth of public debt. According to Spanish Prime Minister Pedro Sánchez, “green” investments of 0.1% of GDP can prevent eight times greater economic losses and significant tax revenue losses. The European Central Bank has also proposed a pan-European public-private reinsurance system with the support of an EU fund. The key question now is whether the escalation of climate risks will create sufficient political will to undertake the initial costs necessary for such preventive measures.
