It is a divide that has characterized the eurozone for years: the difference in economic prosperity between north and south. During the euro crisis (2011-2013), northern countries guaranteed the rescue of Greece, Spain, Portugal and Cyprus through support funds. This was followed by a Greek crisis (2015) and, at present, the corona crisis, which hit countries like Italy and Spain earlier and harder than northern countries, further widening the gap.
During those crises, the European Central Bank repeatedly stepped in to support vulnerable banks and governments. The same ECB on Wednesday mentioned a relatively new financial-economic risk that could deepen the gap between ‘north’ and ‘south’: climate change. For the first time, the ECB conducted a ‘climate stress test’ for the economy and the financial sector in the eurozone. Financial data and climate data on 1,600 banks in the eurozone and on millions of companies were combined with climate models.
The ECB’s conclusion: climate change is a ‘major source of systemic risk’ for the next 30 years. For all of Europe, but certainly for the south. The physical impact of global warming could hit the Mediterranean countries extra hard, the ECB says. Extreme heat – think of the barely 49 degrees measured in Sicily this summer – water shortages and forest fires increase the risk of damage to production processes and supply routes of companies, which become less profitable or could go bankrupt.
As a result, banks that have provided credit to those companies may also find themselves in a bind. There is also a physical climate risk in Northern and Central Europe, in the form of floods such as those that occurred last summer in Belgium, Germany and the Netherlands. But this risk is relatively limited for companies there, according to the ECB calculations.
The number of companies in Southern Europe exposed to ‘high physical climate risk’ is between 25 percent (Italy) and almost 100 percent (Greece). In Northern Europe it is less than 10 percent. This difference is reflected in the risks for banks identified by the ECB. More than 60 percent of bank loans to companies in Greece, Cyprus, Portugal and Spain have been labeled ‘high physical climate risk’ by the ECB. In France, the Netherlands and Germany this is below 10 percent.
In addition to physical climate risk, the ECB sees the ‘transition risk’: due to the energy transition, companies have to accelerate the phasing out of traditional, polluting revenue models and production processes, sometimes at high costs. Some fossil fuel companies are disappearing altogether. Write-downs and bankruptcies of these companies also affect the banks that financed the companies. This risk applies to Northern and Southern Europe to about equal extent, the ECB found.
Also read: Climate becomes touchstone of ECB monetary policy
The ECB’s message after the climate stress test is: it is better to take ‘quick’ and ‘ordered’ measures to reduce greenhouse gas emissions than to wait. Although the transition costs are high in the short term – fossil economic activities must be stopped – the physical damage caused by heat, drought and natural disasters in the long term is much lower. Delaying climate policy means a ‘disorderly’ scenario in which tough measures must still be taken ‘abruptly’, at a higher cost. A third scenario of rampant climate change (with a global temperature rise of 3 degrees or more) is economically completely destructive. The damage from natural disasters would then amount to 10 percent of the GDP of the eurozone in 2100, compared to a scenario in which action is taken in a timely manner.
These kinds of scenarios are based on a mix of climate models and economic models and are surrounded by a lot of uncertainty. And although financial and economic authorities are still at the beginning of this complex type of investigation, their message to politicians is consistent: who should CO2emissions, prevents major problems later. De Nederlandsche Bank, which previously conducted a climate stress test, and the International Monetary Fund, among others, are propagating this.
Even more difficult is the integration of climate risk in the supervision of banks and other financial institutions. For the ‘classic’ financial risks, there are bank buffers, which were tightened after the financial crisis of 2008/2009, in the so-called ‘Basel 3’ regulations. A ‘Basel 4’, with further tightening, should be introduced shortly. But a ‘Basel 5’, which includes climate risks, is yet to come. Next year, the ECB will conduct a second climate stress test, specifically for the banking sector. This should look more closely at climate risks on the balance sheets of the banks.
ECB: Climate change poses additional risk for businesses and banks in Southern Europe
Source link ECB: Climate change poses additional risk for businesses and banks in Southern Europe