New research reveals how climate-related disasters in distant regions could lead to significant GDP losses in Europe.
Climate change doesn’t just impact the regions where extreme weather events occur—it has far-reaching consequences that ripple across the globe. Often, the focus is on the direct physical effects within a region. “For example, Europe is generally seen as less vulnerable due to its strong adaptive capacities and fewer occurrences of severe events like droughts,” explains CSH’s Andrea Vismara. But what happens when Europe’s economy relies on imports from regions severely affected by climate disasters?
MAJOR GDP LOSSES DUE TO INDIRECT EFFECTS
In a recent SUERF Policy Brief, Vismara, alongside Stephan Fahr and Richard Senner from the European Central Bank, explores how climate-related disasters in one part of the world can have significant economic repercussions in others. Their study shows that GDP losses in the Eurozone could surpass 10%—a figure nearly 15 times greater than the direct climate shock expected for the region. Countries most at risk include Mediterranean countries with high direct exposure to physical climate risks, as well as nations with extensive trade links, such as Germany and Luxembourg.
“When we consider only the direct effects of climate change—like water stress, physical events, and heat stress—GDP losses in Europe are expected to be less than 1%. However, in South Asia, losses could reach up to 15%, in Central Asia up to 7%, and in Sub-Saharan Africa up to 6%,” says Vismara.
USING INPUT-OUTPUT DATA
To get a complete picture of these potential losses, the researchers combined input-output data at the sector and country levels—looking at how much different sectors produce, how much is sold between sectors, and the demand within each country—and built a simulation model. They estimate that when supply dependencies are taken into account, average GDP losses in Europe could reach 10%, and in some scenarios, even up to 20%.
“This is especially important because there could be critical vulnerabilities in the system. For example, the global production of microchips is very concentrated in South Asia. If there is a disruption in production there, many car manufacturers in Europe who rely on these microchips wouldn’t be able to produce cars anymore,” explains Andrea Vismara.
Understanding these potential real-economy losses is also crucial for better assessing risks that could spill over into the financial system. This research underscores the importance of viewing climate change as a global challenge with economic impacts that transcend borders.
About the policy brief
The policy brief “The Globalization of Climate Change: How Interconnected Economies Amplify Physical Risks” was published by SUERF, and the working paper “The Globalization of Climate Change: Amplification of Climate-Related Physical Risks through Input-Output Linkages” by S. Fahr, R. Senner, and A. Vismara was published on the ECB website.
