It is the divide that has characterized the eurozone for years: the difference in economic prosperity between the North and the South. During the euro crisis (2011-2013), the Nordic countries secured the bailout 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 the Nordic countries, further widening the gap.
During those crises, the European Central Bank repeatedly intervened to support vulnerable banks and governments. The same European Central Bank on Wednesday mentioned a relatively new financial and economic risk that could deepen the North-South divide: climate change. For the first time, the European Central Bank conductedClimate Stress Testof the economy and financial sector in the eurozone. The financial and climate data of 1,600 Eurozone banks and millions of companies were combined with climate models.
ECB 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 European Central Bank says the physical impact of global warming could hit Mediterranean countries hard. Severe heat — think the 49-degree temperature measured in Sicily this summer — water shortages and wildfires increase the risks of damaging production processes and supply routes for businesses, which become less profitable or may go bankrupt.
As a result, the banks that extended credit to those companies may also find themselves in trouble. There are also physical climate risks in northern and central Europe, in the form of floods like those that occurred last summer in Belgium, Germany and the Netherlands. But that risk is relatively limited for companies there, according to ECB calculations.
The number of companies in southern Europe exposed to “high physical climate risk” is between 25 percent (Italy) and close to 100 percent (Greece). In Northern Europe it is less than 10 per cent. This difference is reflected in the risks to banks identified by the European Central Bank. More than 60 per cent of corporate bank loans in Greece, Cyprus, Portugal and Spain have been rated as “high physical climate risk” by the European Central Bank. In France, the Netherlands, and Germany, this is less than 10 percent.
In addition to the physical climate risks, the European Central Bank sees “transformation risks”: due to the energy transition, companies must accelerate the phasing out of polluting traditional revenue models and production processes, sometimes at high costs. Some fossil fuel companies are disappearing entirely. The delistings and bankruptcies of these companies also affect the banks that financed the companies. The European Central Bank found that this risk applies to Northern and Southern Europe to a roughly equal extent.
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The ECB’s message after the climate stress test is: It is better to take “swift” and “orderly” measures to reduce greenhouse gas emissions rather than wait. Although the costs of relocation are high in the short term – fossil economic activities must be stopped – the physical damage from heat, drought and natural disasters in the long term is much less. Delaying climate policy means a “disorderly” scenario in which drastic measures still have to be taken “abruptly” and at a higher cost. The third scenario of rampant climate change (with a global temperature increase of 3 degrees or more) is completely economically devastating. The damage from natural disasters would then amount to 10 percent of the eurozone’s GDP in 2100, compared to the scenario in which action is taken in a timely manner.
These types of scenarios are based on a mixture of climate and economic models and are surrounded by a lot of uncertainty. And although the financial and economic authorities are still at the beginning of this complex type of investigation, their message to politicians is consistent:2emissions, prevents major problems later. These include De Nederlandsche Bank, which was formerly Climate stress testThe International Monetary Fund publishes it.
Even more difficult is the incorporation of climate risk into the supervision of banks and other financial institutions. For “classic” financial risks, there are banking reserves that were tightened after the 2008/2009 financial crisis, in the so-called “Basel III” regulations. ‘Basel 4′, with more emphasis, should be introduced soon. But “Basel 5”, in which climate risks are listed, is yet to come. The European Central Bank will conduct a second climate stress test next year, specifically for the banking sector. It should look closely at the climate risk in banks’ balance sheets.
A version of this article also appeared in NRC Handelsblad on September 23, 2021
A version of this article also appeared on NRC on the morning of September 23, 2021
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