Low insurance coverage is turning EU governments into disaster insurers of last resort, strengthening the case for prevention and adaptation finance.
Climate-related disasters are affecting the public budgets of a number of European Union countries, with government spending replacing low insurance coverage in a context of more frequent and intense extreme weather in the future. The experience of the direct costs from floods and droughts in six EU countries between 2021 and 2024 demonstrates the extent to which fiscal costs are affected by reliance on ad-hoc allocations from public budgets after such events. Fewer losses would fall on the state if private insurance played a bigger role and if governments invested more in prevention, adaptation and public risk financing.
The ‘integrated framework for European climate resilience and risk management’ under preparation by the European Commission can help to manage the fiscal risks by establishing national and European plans that foster:
Input from Matteo Calcaterra is gratefully acknowledged.
Climate impacts are no longer a marginal or far-future risk, but a structural macro-fiscal problem today. They will rapidly get more expensive in Europe because it is the world’s fastest-warming continent (EEA, 2024). Between 1980 and 2024, direct economic losses in the European Union arising from weather- and climate-related extremes amounted to €822 billion (EEA, 2025a), with a quarter of the damage occurring in the last four years of the period (Figure 1). Moreover, these estimates only include direct damage, such as the destruction of infrastructure and housing, not indirect costs, such as lower output and productivity or increased healthcare costs.
Figure 1: Annual EU direct economic losses from extreme weather and climate events, 1980-2024, 2024 prices
Source: Bruegel based on EEA (2025a).
In principle, EU governments can invest now to minimise damage later. For hazards such as floods, storms and wildfires, pre-funded reserves, insurance and rapid disbursement capacity would improve shock absorption. Long-term planning can encompass adaptation investments, managed relocation frameworks, and integration of climate risks into multi-year fiscal planning and debt sustainability analyses (Zenios, 2022).
Such planning needs to take into account that extreme events – primarily floods, heatwaves and storms – drive the largest climate-related losses in Europe, with 1 percent of events accounting for 37 percent of losses, and 5 percent of events for 66 percent of losses (Figure 2).
Figure 2: EU direct economic losses by event type 1980-2024, 2024 prices
Source: Bruegel based on EEA. Note: direct losses to infrastructure and physical assets.
Both fast and slow-onset events will cause the fiscal costs to rise. At regional level, economic impacts are felt through both direct damage and through reduced output and productivity, with emigration from the affected area reducing labour availability (Kraler et al, 2020). The indirect costs of climate-related disasters can exceed the costs of the immediate damage by up to five times through their impact on supply chains (Lenzen and Li, 2025). Heatwaves and droughts reduce output in both the short and medium terms (Mastropietro et al, 2026). The impact of floods depends on regional income levels, as lower-income areas may not have the means to build back better (Usman et al 2025a). The costs of extreme events often mount over time. For example, summer heatwaves in 2025 resulted in a €43 billion loss in gross value added (GVA) in that year, but historical patterns indicate it could lead to an annual GVA loss of €126 billion by 2029 (Usman et al, 2025b).
To explore how EU countries could manage the fiscal costs better, we start in section 2 with an overview of the channels via which climate damage is felt. We then present case studies of acute climate-related events from 2021 to 2024 and analyse how the impact on public finances was affected by preparedness and response strategies. We also look at the role of insurance in different EU countries. Extrapolating from these case studies, we assess the potential fiscal impact were similar events to occur more frequently and in several parts of the EU simultaneously. We conclude with policy recommendations for an integrated climate resilience strategy. The European Commission could integrate these in the integrated framework for European climate resilience and risk management proposal that it plans before the end of 2026.
Economic research on climate impacts has focused on inflation and prices, particularly food prices (eg Ciccarelli et al, 2024) but climate-related economic damage is felt through multiple channels (Table 1). Damage to vital energy and transport infrastructure can have substantial knock-on effects on the whole economy if not repaired quickly.
Table 1: Macroeconomic impacts of extreme weather events
| Channels | Macroeconomic impact | Policy relevance | Examples (literature) |
| Public budget | Climate shocks increase disaster relief and reconstruction spending, creating fiscal pressureLower fiscal revenues from affected areas | Fiscal volatility, government as insurer of last resort (<20% insured on average) | €822bn in economic losses 1980-2024 in the EU (Figure 1), of which parts were covered by public budgets |
| Productivity and output | Extreme events reduce capital and labour productivity, and damage infrastructure | Effects on potential growth, with varying degrees of persistency | Even years after the event, GDP lower (Usman et al, 2025a): Heatwaves (2 years): 1.5 percentage points Droughts (4 years): 3 percentage points Floods (4 years): 2.8 percentage points |
| Inflation | Climate shocks generate supply-side price spikes (food, energy, reconstruction) | Monetary policy will have to adapt to these supply side shocks | Europe summer heat in 2022: food inflation +0.67 pp, headline inflation +0.34 pp (Kotz et al, 2024)By 2035, temperature increase could: food inflation +1%-1.5%, headline inflation +0.5-0.8 pp (Kotz et al, 2024) |
| Debt sustainability | Impact on debt sustainability through effects on public budget, output, inflation (see above) and interest rates | Lower fiscal space and resources to service debt | Increase cost of debt financing (Calcaterra et al, 2025):Low-climate impact: 0.25% of GDP High-climate impact: 3% of GDP |
| Supply chains | Fast-onset: floods, heatwaves, storms Logistics Manufacturing Agriculture (reduced production) Slow onset: droughts, sea-level rise Changes in production location, routes | Economic security considerations regarding crucial dependencies | Rhine river and Panama Canal – droughts impacting water levels and impairing transit (Barata da Rocha et al, 2025) Floods in Slovenia disrupted production in automotive part suppliers, leading to production reductions elsewhere (see section 3.1.) |
| Energy infrastructure | Reduced energy output leading to higher prices, or production curbs | Security of energy supply; safety issues (eg nuclear) | Heatwaves reduce nuclear power generation (France in 2022) Storms affect grid and energy infrastructure (Poland in 2017, Ireland in 2024) |
Sources: Bruegel based on sources noted in table or corresponding text.
For public budgets, there are several effects: extreme events reduce tax revenue because economic activity falls, while governments pay out more unemployment and social benefits, and public authorities must direct other funds to help affected regions. Increased inflation will affect government spending as well. Climate risks are also likely to affect sovereign interest rates through climate premia (Zenios, 2024). Increased debt-servicing costs are particularly problematic when sovereign debt levels are already high (see section 4).
Supply chains are another important channel for import-dependent European economies. Severe regional GDP losses affect the global economy through trade and financial linkages (NGFS, 2025). Drought can affect power production by nuclear power plants, as in France in the summer of 2022 (Emiliozzi et al, 2024). Storms can severely damage energy infrastructure, as happened in Poland in 2017 (Szmitkowski et al, 2019). Ireland’s response after Storm Éowyn in 2025 entailed high fiscal costs.
Future macroeconomic damage from climate change will be an order of magnitude greater than previously thought (Bilal and Känzig, 2024). Globally, observed real-world conditions are more extreme than the central projections of climate models (the main reference being IPCC, 2021). Multiple indicators of global warming, including ocean temperatures, sea levels and land surface temperature, are breaking previous records by unprecedented margins (Kuhlbrodt et al, 2024; Molodtsov et al, 2025; Diamond et al, 2024; WMO, 2026, Raghuraman et al, 2024).
Meanwhile, the forest, soils and oceans that absorb carbon dioxide and regulate temperature and precipitation are becoming caught up in a negative feedback loop: climate change significantly weakens their resilience, so heatwaves, floods and droughts cause more damage without these natural buffers (Friedlingstein et al, 2026; Meyer et al, 2022). Nature degradation is particularly important for corporate financing; in euro area, for example, 75 percent of all corporate loan exposures rely significantly on at least one ecosystem service (Boldrini et al, 2023).
The compounding of extremes is rising significantly. Heat and drought levels that were virtually impossible 20 years ago could become one-in-ten year events as early as the 2030s (Suarez-Gutierrez et al, 2023). The record global ocean surface temperatures of 2023 were a one-in-512 year event – until reaching a further high in 2025 (Terhaar et al, 2025; WMO, 2026).
Global warming is now likely to reach 2°C before 2050, a level associated with major disruption to water and food systems, migration and human health, increasing the risk of climate-driven inflation, financial shocks and the withdrawal of insurance from high-risk areas much sooner than expected (IFoA, 2026).
Europe’s climate is more difficult to model than most regions (Tsartsali et al, 2025), with precipitation extremes particularly uncertain (Befort and Kruschke, 2025). The European Environment Agency (EEA) identifies crop failure, wildfires, heat stress and flooding as the near-term risks with the highest confidence (EEA, 2024). Western and southern Europe have borne around 85 percent of cumulative losses to date (Figure 3), reflecting differences in exposure, asset concentration and vulnerability (Schuiling, 2024). Yet all EU countries face near-term exposure (Figure 4). Because all countries are affected, it is difficult to diversify risk across Europe, causing systemic exposures for the whole EU.
Figure 3: Historic economic losses per capita, 1980-2024
Source: Bruegel based on EEA (2025a). Note: aggregated losses for 1980-2024 for all weather- and climate-related event types.
Figure 4: High risk areas for wildfires (left panel) and floods (right panel)
Source: Bruegel based on Copernicus and EEA. Note: very high wildfire risk areas are grid cells (~12.5 x 12.5 km) where more than 75 percent of the cell area has conditions conducive to wildfires, including dry vegetation, terrain and climate factors. Areas of potential significant flood risk are shown as self-reported by the member states to the European Commission.
The past is not an accurate guide to future climate impacts. Because of the accelerating rates of change in the main physical climate indicators, damage functions for analysing economic implications need updating (Abrams et al, 2026). The risks result from how investors and governments act today based on their perception of future risks (Battiston et al, 2021): these perceptions need updating with the latest science.
Given that forecasting physical climate change is so difficult, especially for Europe, risk modelling provides a useful approach to assessing potential damage. A one-in-100 year event in the EU (major earthquake or flood) could raise fiscal liabilities by 7 percent to 17 percent (World Bank, 2021). The European Central Bank (Ceglar et al, 2025) found that an extreme but plausible one-in-25-year drought would put nearly 15 percent of economic output at risk, given that over a third of corporate loans (more than €1.3 trillion) go to sectors exposed to high risk of water scarcity.
Possible future impacts can be quantified by simulating how past events might have different impacts with global warming of 2°C, which is expected within the next 15 years. Mastropietro et al (2026) found that the economic impact of the intense drought of 2015-2018, which affected large portions of central and western Europe, would, with 2°C of warming, double to a cumulative loss exceeding 5 percent of EU GDP.
Another approach is to project forward increasingly frequent and more intense climate-related events that occur in multiple locations in the same year. Compounding hazards across Europe could cut annual GDP by up to 4.7 percent by 2030, while supply-chain disruptions from hazards elsewhere could reduce it by a further 1.8 percent (Mauderer and Stracca, 2025). More frequent events leave less time for recovery before the next one, progressively reducing resilience. Moreover, repeated calls on public budgets for disaster relief reduce the amount available for investment in adaptation to reduce the impact of the next event, creating a downward spiral.
Extreme weather disasters in the EU since 2021 provide real-world indications of the fiscal costs of climate-related events (Table 2). We focus on total damage but it should be noted that lower damage might indicate effective adaptation measures, rather than a less-intense event (information on adaptation investments and their effect on damage is lacking; see section 4.4). The annexes provide more detail on, and extensive sources for, the case studies.
Table 2: Disaster damage and spending estimates
| Country/region, disaster type, year | Casualties | Direct physical damage (€ billions) | Planned fiscal spending | Insurance payouts | EU funds | Estimated public coverage of damage |
| Western Europe, floods, 2021 | 231 | €32–€53 | €32 billion | >€9 billion | €705 million | DE: 65%-105% BE: 32%-76% NL: 6.5%-11% |
| Slovenia, floods, 2023 | 3 | €7-€10 | €3.2 billion | €152 million | €428 million | 36%-49% |
| Spain, floods, 2024 | 221 | €12–€18 | €6 billion | €4.8 billion | €1.6 billion | 42%-63% |
| Romania, drought, 2022 | – | €1.0–€1.3 | €74 million | €50 million | €34 million | 8%-11% |
Sources: Bruegel based on European Commission, EMDAT and other sources (see Table A1 in the annexes for details). Notes: fiscal spending does not include EU spending. All numbers are rounded. Ranges in the last column reflect the range of underlying damage estimates: planned fiscal measures, combining national and EU measures over damage estimates.
In July 2021, several European countries were affected by severe flooding along the Meuse/Maas and Rhine rivers, most severely affecting the Ahr/Aar tributary. Estimates of direct physical damage ranged from €32 billion to €53 billion, making the floods the most expensive extreme weather event in Europe since 1980. Germany was by far the most affected (€29 billion to €47 billion; 0.8 percent to 1.3 percent of GDP), followed by Belgium (€2.4 billion to €5.6 billion; 0.5 percent to 1.1 percent of GDP) and the Netherlands (€350 million to €600 million; 0.04 percent to 0.06 percent of GDP).
Private insurance coverage in Germany was low, so the government drew on national, local and EU funds of around €31 billion to cover between 65 percent and 105 percent of the estimated damages. However, disbursement of ad-hoc government funds was slower than private insurance payouts or dedicated government funds with corresponding administrative capacity. In addition, fragmentation of institutional responsibilities, data-sharing constraints, limited information during the flood and poor risk awareness among the public led to the failure of early-warning systems, likely increasing the damage and loss of life (EEA, 2024).
Insurance penetration in Belgium was high, with insured damage estimated at €2.2 billion, covering between 40 percent and 90 percent of the total. However, Belgium’s public-private insurance partnership caps insurers’ disaster liabilities. This helps increase insurability, but means the government must act as the insurer of last resort for large-scale events. As in Germany, bureaucratic obstacles to rebuilding emerged, and there were labour shortages in the construction sector in Wallonia, likely increasing secondary costs related to the disaster.
In the Netherlands, the disaster hit a high-risk area considered uninsurable by the private sector, so the Dutch government used a specific government fund as the basis for total public finance expenditure of around €39 million to cover between 6.5 percent and 11 percent of the estimated damage. The Dutch approach raised the issue of moral hazard, whereby households and businesses do not purchase insurance because they expect the government to compensate them. In this case, some of the uninsured damage that could have been insured was covered by a government fund that is only supposed to cover uninsurable damages. This decision blurred the line between the responsibilities of insurers and the government (Deelen et al, 2025; see also the note to Table 2 and the annexes).
The massive scale of the August 2023 floods in Slovenia caused physical damage equivalent to 16 percent of the country’s GDP, or up to €9.9 billion. Relative to the scale of the disaster, damage covered by insurers and the government was limited – between 36 percent and 49 percent, leaving a large proportion borne by society. As in Germany, reconstruction was affected by capacity constraints, along with procurement and procedural bottlenecks, resulting in paid-out assistance from the state of about €1.5 billion at time of writing. The floods affected the broader European economy because of Slovenia’s role in automotive supply chains. Carmakers including Volkswagen were forced to reduce or halt production.
Severe flooding in the Spanish province of Valencia in late October 2024 resulted in damage estimated at between €11.9 billion to €18.1 billion (0.8 percent to 1.1 percent of Spanish GDP). A fifth of public and private assets (valued at €86 billion), including buildings, machinery and infrastructure, was destroyed. Long-term under-investment in hydraulic infrastructure in Valencia magnified the economic and asset losses.
The fiscal and economic impact of this major event was offset significantly by Spain’s special catastrophe fund, the Consorcio de Compensación de Seguros (CCS). Total public spending amounted to €7.6 billion, between 42 percent and 63 percent of the damage. The CCS, which is funded through a compulsory levy added to private insurance contracts, covered an estimated €4.8 billion of damage, the largest flood-related insurance payout in Spanish history. The CCS’s role as a social protection and risk-sharing mechanism also limited the direct impact on private insurers (Bray et al, 2024). However, the Valencia floods depleted around one-third of the CCS’s reserves, highlighting the growing strain that climate-related disasters are putting on even well-funded catastrophe insurance systems.
Severe drought contributed to damage in western and southern Europe of around €45 billion in 2022, with 15 percent to 30 percent drops in crop yields compared to the previous five years (Bevacqua et al, 2024). Romania suffered particularly extensive damage because of the long duration of the drought, which affected 4 percent of its territory from 2000 to 2020, with the affected area expanding to 14.7 percent in 2022 (European Commission, 2024).
Water scarcity causes mostly indirect damage, such as decreased agricultural yields, which is harder to estimate than direct damage from extreme weather events. Estimated production losses in 2022 were €13 billion across all EU countries (Pinke et al, 2024), and in Romania between €1 billion and €1.3 billion (0.4 to 0.5 percent of GDP), affecting about one million hectares of crops.
Romania’s national disaster relief funds are reactive and allocated ad hoc rather than through a pre-funded or rules-based disaster mechanism. In the wake of the 2022 drought, the government provided direct compensation to farmers of €74 million from the state budget, complemented by €34 million from an EU natural disaster relief fund, the Solidarity Fund (EUSF). We estimate that the total covered only about 8 percent to 11 percent of losses. Insurance coverage was low and poorly aligned with climate risks, leaving over €950 million (more than 95 percent) of uninsured losses, most likely absorbed by farms (Fi-compass, 2025).
The drought exposed governance failures rooted in relying on reactive crisis management rather than anticipatory risk planning, resulting in unpredictable and non-comprehensive risk coverage. Following repeated drought shocks, the Romanian government plans a drought insurance scheme, moving away from emergency payouts and towards earlier risk protection.
For Europe overall, the 2022 drought reduced GDP growth per capita by 1.35 percentage points, corresponding to a GDP loss of €203 billion (Mastropietro et al, 2026). Investment dropped by 5.38 percent compared to what could have been expected without the drought and employment by 1.26 percent. If the same event were to occur in a 2°C of warming scenario, the economic losses would roughly double: GDP per capita would fall by 2.33 percentage points, investment by 8.63 percentage points and employment by 2.21 percentage points.
Table 3: Main case-study takeaways
| Fiscal and administrative governance | Insurance protection gap | Adaptation and infrastructure |
| Germany and Slovenia: Administrative bottlenecks, bureaucratic hurdles and limited local municipal capacity delayed aid for years. | Germany and Romania: Low insurance penetration compelled the government to step in as the primary financier, creating a massive fiscal burden on budgets. | Spain: Long-term under-investment in infrastructure significantly increased vulnerability. |
| Romania: Reactive, ad-hoc compensation was less efficient and less predictable than anticipatory risk planning. | Spain: A pre-funded, public-private insurance model was effective at cushioning economic impacts and protecting private insurers from insolvency. | Germany: Fragmentation of data sharing and poor risk awareness led to a systemic failure of early warning systems. |
| Netherlands: Broad government compensation schemes risk moral hazard if applied inconsistently. | Belgium: Mandatory insurance ensured high coverage but required government intervention for large damages. | |
| Netherlands: High-risk areas deemed uninsurable by the private sector depended on specific public funds to cover large floods. |
Source: Bruegel. Note: see the annexes for details.
The examples in sections 3.1.1 to 3.1.4 show the need to improve the structural organisation of financing from public budgets for climate disaster prevention and relief. EU governments rely largely on ad-hoc financing instruments, with only four countries – Austria, France, Hungary and Italy – having dedicated disaster funds (World Bank, 2021). Ad-hoc financing instruments are usually implemented under the flexibility measures of national budgets (Radu, 2021), which allow for fast mobilisation in emergencies but do not allow for specific provisions on the use of funds, such as ‘build-back-better’ requirements. Governments may also lack administrative capacity for efficient disbursement. The overall size of these funds depends on national regulation and fiscal space.
EU funds for post-disaster recovery supplement national budgets (European Commission 2025). The EU Regional Emergency Support to Reconstruction Regulation (RESTORE, Regulation (EU) 2024/3236) allows EU countries to reprogramme their cohesion funds for rebuilding, which mobilised another €1.7 billion in 2025.
In the 2028-2034 EU budget, funds such as the EUSF and the EU Civil Protection Mechanism (UCPM) could be extended and additional flexibility in their use allowed. But even with this increase, the EU budget will likely remain a small support instrument, given that the overall allocation is smaller than historical damage estimates. The EU funding for natural disasters in 2028-2034 could be about €5 billion, which would be about 10 percent to 15 percent of the total damage from just the 2021 west European floods (Figure 5). Given the increasing frequency and severity of climate events, the EU budget will continue to play a minor role in disaster relief, but pooling resources at EU level could bring efficiency gains in limiting the longer-term extent of damage and certain areas of disaster response (see section 4.4).
Figure 5: EU budget capacity for disaster response
Source: Bruegel based on European Commission and EEA. Note: All values expressed in 2024 prices, annual economic losses refer to physical damages based on EEA data. MFF = Multiannual Financial Framework, SEAR = Solidarity and Emergency Aid Reserve, EUSF = European Solidarity Fund, UCPM = EU Civil Protection Mechanism. EUSF underlies SEAR, which combines the fund with the Emergency Aid Reserve. As part of the 2021-2027 budget mid-term review, the allocation to SEAR has been raised to €1.5 billion, which we assume in an extreme case can be allocated fully to the EUSF.
The scale of climate-related damage observed from 2021 to 2024 provides a reference point for assessing future fiscal risks. The total direct physical damage in EU countries of €208 billion (EEA, 2025a) during this period falls between the 84th and 95th percentile of projected damage for 2027-2030 in climate modelling by van der Wijst et al (2023). What was until recently considered an exceptional outcome may increasingly represent a plausible baseline.
To estimate future damage compared to historical trends, we extrapolate from current damage, suggesting total damage could reach about €219 billion over 2027–2030 in a baseline scenario, representing a real-term increase of around 5 percent over 2021-2024 (in line with estimates by van der Wijst et al, 2023). A more adverse scenario, based on the growth rate of the 10-year damage average over the same period, would result in damages of around €284 billion over 2027-2030, an increase of about 37 percent in real terms. This simple calculation ignores second-order effects, such as lower tax revenues or productivity effects. It simply creates a ‘what if’ scenario in which the damage from 2021-2024 is repeated with a linear increase in frequency and magnitude. Fiscal planning will also need to consider the pace at which climate-related damage accelerates.
The fiscal implications vary considerably depending on the insurance and government intervention frameworks in place, which are very different across the EU (Monasterolo et al, 2025a). Some insurance schemes include mandatory insurance elements, such as in Belgium, while others rely fully on private market mechanisms, as in Germany. Insurance coverage across EU countries for damage from weather- and climate-related extreme events between 1980 and 2024 ranged from 1 percent in Romania to 61 percent in Denmark (EEA, 2025a). For the EU aggregate, coverage is about 20 percent. More generally, greater insurance coverage implies efficiency gains relative to payouts by governments and individual costs borne by households (see section 4.2 for a more detailed discussion).
We set out three illustrative scenarios for the damage total we have calculated for 2027-2030 (Figure 6):
Caveats: the scenarios do not distinguish by disaster type, although storm and hail events have historically had insurance coverage rates of about 36 percent, while floods average 15 percent, and droughts, wildfires and heatwaves lag further behind at 10 percent to 11 percent. Nonetheless, they show that the distribution of fiscal and social costs is highly sensitive to the insurance and governmental intervention frameworks in place, and that for both of these, there is substantial room for improvement across EU countries.
Figure 6: Damage coverage scenarios, %
Source: Bruegel based on EEA (2025a).
As section 3 shows, current financial instruments are insufficient to address the direct damage caused by increasingly frequent and severe climate-driven events ad hoc. In case these events trigger a complex transmission channel known as the “climate sovereign doom loop” (Monasterolo et al, 2025b; Zenios 2024) the situation would be even more severe: disaster losses would lead to lower economic growth and reduced fiscal revenues, in turn increasing the costs of debt refinancing. Deteriorating credit ratings and investor expectations would increase the cost of new debt financing, making proactive adaptation even costlier (Monasterolo et al, 2025b; Calcaterra et al, 2025). This systemic risk would be compounded when extreme weather events occur simultaneously, and with other economic shocks such as pandemics or energy crises (Dunz et al, 2023).
To avoid entering the doom loop, an integrated strategy (summarised in Figure 7) should be implemented across the EU to combine adequate public and private adaptation investments (section 4.1), sufficient private insurance (section 4.2), incentive-compatible government relief funds (section 4.3), multilateral risk pooling (section 4.4) and coherent policy governance (section 4.5).
Figure 7: Summary of recommendations
Adaptation could reduce the impact of climate hazards significantly (EEA, 2023), provided there is sufficient institutional and economic capacity (which Europe has, for the most part). By lowering the exposure and vulnerability of assets to climate hazards, adaptation takes the burden off public budgets by reducing the need for emergency relief and reconstruction spending. Proactive investments such as early-warning systems, coastal defences and flood plains deliver significantly larger returns than reactive responses. For example, creation of flood plains as water retention areas could reduce river flood losses across the EU and UK by 80 percent (Dottori et al, 2023). There is also a growing need for cross-border adaptation investment, for example, along rivers that define national frontiers or run through several countries.
Cost-effective adaptation could avoid over €260 billion in annual damages by 2100 (Feyen et al, 2020) and adaptation investments yield a high fiscal multiplier: every dollar spent on adaptation can yield up to ten dollars in economic benefits (UNEP, 2024). However, adaptation has so far been fragmented, local and incremental, with negligible evidence that risks have been reduced and limited evidence of transformational adaptation (Berrang-Ford et al, 2021). Though most EU countries have national adaptation strategies and plans, the EU has structurally under-invested in adaptation (European Commission, 2025; Salmon-Genel, 2025), with adaptation spending of about €29 billion per year against annual needs ranging from €35 billion to €500 billion (EIB, 2021) (European Commission, 2026b, estimates €70 billion). The fundamental problem is that costs fall immediately on budgets, while the benefits accrue slowly and are dispersed across the economy.
Many EU countries already have frameworks for assessing climate risk and preparing adaptation measures, but have so far under-invested (including measures recommended by ECB/EIOPA, 2024). Common barriers include insufficient long-term funding, the lack of clear budget lines for adaptation and underdeveloped monitoring and evaluation frameworks, making it difficult to assess whether adaptation measures actually reduce vulnerability (EEA, 2025b). A good way forward would be to systematically identify risk owners at different levels of government. The forthcoming EU climate resilience and risk management proposal (see footnote 3) should establish common assumptions for all levels of government to conduct climate risk assessments and attribute responsibilities for adaptation. The EU should also facilitate coordination between national adaptation strategies to gain scale advantages.
Private sector investment in preparation for extreme events and broader adaptation for multiple climate risks should be encouraged through targeted measures to address market failures, including high upfront costs and long and uncertain investment horizons. It is vital to distinguish more clearly between adaptation measures that are public goods, which should be funded publicly, and those that should be the responsibility of firms and households. Governments should avoid distorting incentives (eg unconditional bailouts) that increase moral hazard, instead providing targeted support for investments with positive spillovers. By ensuring that the private sector shares in risk management and adaptation investment, governments can encourage the protection of private assets, further reducing the state’s contingent liabilities.
Forward-looking climate risk assessment and climate-impact data would help governments at all levels prepare for increasingly frequent and intense climate disasters. Granular data from insurance and national authorities should be collected systematically and there should be systematic monitoring of climate impacts.
However, as climate impacts increase and irreversible changes – such as sea-level rise – occur, governments will have to recognise limits in some regions to the protection of assets and housing, and instead help with relocation. Relocation measures include stricter zoning laws to ban construction and development in vulnerable areas, planned relocation where needed and greater labour mobility to absorb climate-related shocks across the EU single market.
Investment in upgrading infrastructure to make it resilient to military attack and sabotage should be combined with climate resilience. NATO members have committed to spend up to 1.5 percent of GDP on ‘defence-adjacent’ investments, which could include dual-use infrastructure for protection against multiple hazards, whether man-made or climate-related. The EU’s economic governance framework should embed adaptation investments in its policy tools, allowing sufficient budgetary space and encouraging contingency finance planning by governments (Gagliardi, 2025). Joint debt at EU level for climate adaptation should also be considered (Monasterolo et al, 2025b).
Insurance limits the exposure of public budgets to, and macroeconomic effects of, extreme weather events (ECB/EIOPA, 2023). Private insurance disburses faster than government payouts and incentivises risk reduction and adaptation. Pre-agreed insurance payouts are usually more reliable than ad-hoc coverage from governments, leading to more certainty in economic planning (OECD, 2026). In addition, insurance companies finance themselves through a range of insurance premia, diversifying the risks they face. Neither governments nor households can achieve this efficiency. Low levels of insurance coverage, as outlined in our case studies, will lead to either major government intervention or large social costs for firms and households.
In Europe, only about 25 percent of disaster losses are covered by insurance, dropping as low as 3 percent in Italy (ECB/EIOPA, 2024). Developing a robust disaster insurance market is a priority for debt sustainability. This means closing a gap in which supply is constrained by the ‘uninsurability’ of some risks (Hahn and Mayr, 2024), while demand is suppressed by low risk perception and the expectation of government bailouts.
A precondition for narrowing the gap is a scenario-contingent climate-risk assessment. Strengthening and standardising data about past disaster losses and insurance coverage at the national level is crucial to better inform how to intervene and where. In addition, integrating climate scenarios into fiscal policy models, risk assessment and management frameworks is essential to avoid underestimating the cost of inaction and the co-benefits from early action (Salmon-Genel, 2025).
Insurance firms and financial authorities should move from a backward-looking to a forward-looking approach to risk assessment, based on climate scenarios. The Network for Greening the Financial System has issued short-term climate scenarios that seek to quantify for the next five years, using annual economic and financial risk data, the impact of extreme weather events, transition risk and their interplay on the economy and the financial system (NGFS, 2025). These scenarios are a good example of such a risk-based approach.
On the demand side, Monasterolo et al (2025a) recommended that insurance mandates or making insurance a precondition for accessing post-disaster relief can significantly increase coverage rates and reduce a state’s financial exposure. An example is compulsory housing insurance for mortgages or rental contracts. Such mandatory insurance coverage schemes should thus be deployed to increase insurance coverage.
The current ad-hoc use of financing instruments often results in inefficient intervention (World Bank, 2021) and cannibalises much-needed public investment in disaster prevention and climate resilience (Radu, 2022). It diverts resources away from planned productive investments into unplanned emergency response. Moreover, when the state acts as an implicit insurer of last resort without clear rules, it creates moral hazard by discouraging private investment in insurance or resilience.
To maximise fund impact, the state’s role should be clarified through ex-ante compensation rules, risk-sharing instruments and pre-arranged financing for risks that stay with the public sector. By defining limits before a disaster occurs, government can avoid the perception of an infinite safety net. These rules should enforce the ‘build-back-better’ principle, meaning reconstruction should ensure reduced future disaster relief costs through improved energy efficiency and resilience. Furthermore, clear frameworks for identification of beneficiaries should be put in place to reduce the fraud and inefficiency often seen in ad-hoc relief efforts.
Joint efforts at EU level should be made to reduce pressure on national budgets. Many adaptation investments and disaster relief policies are inherently local. The EU should thus be involved where supranational coordination adds value, in particular as a central coordinator for shared satellite infrastructure, scientific knowledge and harmonised methodologies for assessing risk (Lenaerts et al, 2022). Coordination is particularly vital for adaptation measures that involve cross-border spillovers, such as civil protection infrastructure.
The EU should pool risks to achieve economies of scale and diversification. ECB/EIOPA (2024) found that pooling flood risks across 12 European Economic Area countries could reduce insurance premiums by approximately 26 percent. We recommend a joint disaster relief fund with risk-adjusted contributions to incentivise EU countries to invest in their own adaptation, as lower local risk would reduce fund contributions.
Rules-based risk-sharing for climate losses would help to reduce the disruptive effects of ad-hoc disaster relief and fiscal bailouts. EU countries should set up a system of risk-sharing for extreme losses, including public reinsurance and joint guarantees to close the insurance gap. Agreement on clear rules to limit the expectation that the government will pay damages would help to spread the cost of risk-sharing across society, by encouraging insurance take-up by firms and households. We agree with the proposal for a European natural catastrophe pool consisting of insurers across the EU, in combination with a loan-based backstop of €10 billion to €65 billion, that would reduce the insurance gap (EIOPA/ESM, 2026). The pool across insurers would allow risk diversification, while the backstop expands the scope of insurability while limiting the exposure of taxpayers.
Transitioning to a rules-based risk-sharing model – including the proposed European natural catastrophe pool and a loan-based backstop – would allow the EU to transform climate risk from a largely unmanaged threat into a somewhat more predictable macroeconomic variable.
The EU has started work on embedding resilience into its economic governance framework but it needs to go much further to take account of the rapidly rising risks. The European Commission’s integration of climate considerations into its debt sustainability analyses through scenario analysis (European Commission, 2026) marks a significant first step in including climate risks in fiscal planning (see also Salmon-Genel, 2025).
To enable checking of whether EU countries have sufficient budgetary space and are planning for contingencies, adaptation investments should be integrated into the European Semester, the EU’s yearly cycle of monitoring of national economic policies to ensure alignment with overall EU goals. The EU climate resilience and risk management proposal, due from the European Commission later in 2026, is an opportunity to ensure the systematic integration of climate scenarios into fiscal frameworks at all levels.
Climate disasters are inevitable, but the resulting fiscal crises can be prevented. Policy measures implemented now could reduce the damage and loss of life caused by natural catastrophes, spread the costs of disaster relief and rebuilding and share the burden of preventative investments in adaptation and risk management across the public and private sectors.
The case studies presented in this paper demonstrate that current instruments are only capable of covering a fraction of the damage caused by increasingly frequent and severe climate-driven events. If nothing changes, the state will take on increasing costs in the role of insurer of last resort, dedicating an increasing share of public finance to post-disaster interventions rather than productive investments that also prevent future disasters and reduce the damage by improving resilience.
While too much government coverage would risk moral hazard, efforts to expand insurance coverage – alongside public funds to help the most vulnerable – can minimise the social cost carried by households. As the scale of destruction grows, the impact of existing funds will be diluted and negative feedback loops will emerge if public funds are repeatedly used to rebuild in the path of danger. An integrated strategy across levels of government is essential to ensure that disaster relief does not come at the expense of vital public investment in resilience.
Source : Bruegel
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