From climate and nature risks to economic resilience and competitiveness
The European Central Bank warns climate change and nature degradation are reshaping economies, with 2026’s record summer heat and droughts disrupting transport, energy and agriculture across Europe.
Climate change and nature degradation are no longer external factors but core drivers of economic and financial outcomes, the European Central Bank states, as Europe faces record-breaking heat, droughts and wildfires that disrupt transport, energy production and agriculture. The summer of 2026 was the warmest ever recorded in Western Europe, with water scarcity and ecosystem damage exposing vulnerabilities in sectors reliant on stable natural systems. Extreme heat and low water levels have already contributed to higher wholesale electricity prices, while food prices remain sensitive to weather shocks, demonstrating how climate risks influence inflation dynamics. Central banks and supervisors are tasked with integrating these evolving risks into macroeconomic models to assess long-term impacts on productivity, growth and financial stability.
The ECB highlights that climate-related shocks can leave lasting economic scars, reducing labour productivity, damaging infrastructure and disrupting production chains, with effects persisting for years after events. Evidence shows that extreme weather not only affects economic activity but also increasingly influences prices, underscoring the need for models that capture these dynamic and cross-border risks. The bank notes that while individual events may seem manageable, the cumulative impact of repeated shocks poses a growing structural challenge to economic resilience and competitiveness. International cooperation, such as the Green Swan Conference, is emphasized as essential for advancing knowledge and addressing shared climate and nature-related risks.
Adaptation is framed as a necessity rather than an option, with the ECB calling for pre-emptive measures including advanced early-warning systems, resilient infrastructure and improved water management to mitigate future disruptions. The bank stresses that past emissions have already locked in long-term changes, making adaptation critical for households, firms and financial institutions to maintain resilience in the face of unavoidable climate impacts. Efforts across Europe, from regional investments to EU-level initiatives, are cited as examples of progress, though the challenge remains to scale these measures to meet the scale of the threat.
The ECB underscores that climate and nature risks fall within its mandate, requiring central banks to incorporate these factors into forecasting and policy frameworks to safeguard price stability and financial stability. The bank acknowledges the difficulty of balancing risk assessment under uncertainty, noting that both underestimating and overestimating risks can have consequences, and calls for better data and analysis to reduce uncertainty. Mitigation and adaptation are both necessary, with the latter addressing the consequences of existing climate change while the former targets the reduction of future risks through emissions control.