ECB: Climate is no longer a distant threat, but is already having an economic impact on the EU

Climate change is no longer, as Canada's current Prime Minister Mark Carney said, "a tragedy on the horizon," but rather an urgent and imminent threat to the European economy. Monetary institutions know this and have recognized the need for tools capable of assessing the short-term impact of climate risks. The Network for Greening the Financial System (NGFS) , a global network of central banks and supervisory authorities committed to translating climate and environmental risks into actionable economic metrics, recently responded to this need.

The NGFS recently published a new set of five-year climate scenarios . These models estimate the impact of extreme weather events , such as droughts, fires, floods, or storms, as well as the risks associated with the transition to a low-carbon economy. For the first time, they also consider compound physical risks and their propagation through global value chains, offering a realistic and detailed picture of the systemic impact that climate change may have on the European economy as early as 2030.

In a contribution published on July 9 on the official blog of the European Central Bank (ECB) , Sabine Mauderer (Bundesbank) and Livio Stracca (Deputy Governor of the ECB) analyzed the NGFS scenarios and proposed a new approach to assessing ecological risks, emphasizing how nature degradation and climate change now have tangible effects on the macroeconomy. These factors must be integrated into monetary policy decision-making processes, just like traditional variables such as inflation, interest rates, and growth.

The Disappearing Horizon: Near-Term Climate Risks to 2030

New short-term scenarios developed by the Network for Greening the Financial System (NGFS) show how extreme weather events and environmental policies could affect the economy and inflation.

As economists Mauderer and Stracca highlight, one of the main innovations introduced is the modeling of compound physical risks : for the first time, the NGFS analyzes the impact of extreme weather events that occur sequentially and how these propagate across national borders through global supply chains.

To represent the impact of climate risks, the framework includes four short-term narrative scenarios , in addition to a baseline scenario that reflects countries' existing climate commitments (the so-called Nationally Determined Contributions to the Paris Agreement). Each scenario combines different assumptions about the trajectories of climate policies and the intensity of physical risks:

• Highway to Paris : Imagine an early and globally coordinated net-zero transition.
• Sudden Wake-Up Call : Simulates a delayed and sudden start of the transition, starting in 2027.
• Disasters and Policy Stagnation : Describes a series of acute and repeated climate events on a continental scale.
• Diverging Realities : Analyzes how natural disasters in emerging economies – particularly those rich in strategic raw materials – can generate ripple effects on advanced economies, through disruptions in production chains.

In one of the most critical scenarios, Disasters and Policy Stagnation , Europe faces a sequence of severe climate events: heatwaves, wildfires, and droughts in 2026, followed by floods and storms in 2027. The cumulative effect of these natural shocks could generate a loss of annual GDP in the euro area of ​​up to 4.7% by 2030. The reason? Disruptions in production processes, pressure on vulnerable sectors, and rising credit costs, resulting in rising inflation.

The Diverging Realities scenario predicts that environmental shocks in countries rich in critical raw materials will jeopardize supplies to Europe, resulting in estimated GDP losses of up to 1.8% .

The picture changes significantly in the Highway to Paris scenario, which assumes an early and globally coordinated net-zero transition . In this context, the euro area sees slight improvements in economic growth and employment, with limited inflationary impacts, thanks to the effective use of carbon tax revenues in green technologies.

These benefits are due to the fact that the EU has already launched ambitious climate policies, in particular the European Green Deal , which aims to reduce emissions by 55% by 2030 compared to 1990 levels. However, the Sudden Wake-Up Call scenario , which simulates a three-year delay in the adoption of climate measures, shows negative consequences: falling production and increased inflationary pressure.

Confirming its growing commitment on this front, the ECB has officially announced its intention to include climate and nature among the key factors in its monetary policy assessments. As reported by Green Central Banking , the ECB is expanding the scope of its economic model to also incorporate environmental degradation , biodiversity loss , and water scarcity , recognizing the systemic role of these ecological pressures. This means that the analysis of nature-related risks will gradually become part of the valuation criteria for financial assets and the definition of monetary policy measures.

Among the measures envisaged:

• revision of economic analysis models to integrate environmental risks;
• adapting the collateral framework and purchasing operations to reflect sustainability criteria;
• promoting transparency and data collection on the financial system's exposure to climate and environmental issues.

This is therefore a significant development, which strengthens the ECB 's role not only as a guardian of price stability but also as an actor aware of the structural challenges – political and economic – linked to sustainability.

In their contribution, Mauderer and Stracca also highlight how over €1.3 trillion of European bank loans are currently exposed to sectors vulnerable to the water crisis. And with 15% of the Eurozone's economic output potentially at risk due to surface water scarcity, ignoring these signals would not only be shortsighted, but also incompatible with the ECB's mandate. Integrating climate and nature into monetary policy decisions is therefore not a simple analytical extension, but a commitment to responsibility. With potentially devastating impacts on GDP, inflation, credit, and productivity, climate and environmental risks become macroeconomic variables in their own right. The ECB recognizes this and is preparing to face a new phase in which sustainability, resilience, and ecological governance will be central to protecting the Eurozone economy. The time to act, as the NGFS scenarios demonstrate, is now.