Fires and drought threaten the economy

Moody’s is sounding the alarm, warning that the effects of climate change, fires and droughts, will boost inflation and government spending, hurt tourism and slow economic growth, hurting the creditworthiness of countries most at risk like Greece.

As the rating agency notes in its report, in recent weeks, high temperatures and drought in Europe have led to fires in France, Spain, Portugal, Italy and Greece, and in the EU as a whole, the area of ​​​​scorched territory has reached a historical maximum, exceeding 4.5 million hectares . The drought, the authors of the report add, is also leading to acute water shortages, especially in southern Europe, where, according to the European Commission, almost half of the countries EU is under threat. In the short term, these conditions will weaken agricultural production, and while in most countries the agricultural sector accounts for a small share of gross value added (1.85% in France, 2.18% in Italy, 2.54% in Portugal, 3.02% in Spain and 4.46% in Greece, as of 2021), lower production will put further pressure on food prices.

Amid the energy crisis caused by Russia’s invasion of Ukraine, droughts have also reduced hydropower production in many Eurozone countries. Rising energy and food prices will put further pressure on inflation and undermine consumer spending, which in turn will slow economic growth, Moody’s warns.

The fires will boost inflation and government spending, hurt tourism and slow growth, Moody’s said.

Governments will also incur additional costs for fire fighting and reforestation. For example, last year’s fires in Greece, notes the house, cost the government 500 million euros, or 0.3% of nominal GDP. The EU also said it was in talks to buy more firefighting aircraft. Governments will also likely need to scale up support measures in the most affected areas.

While these costs remain manageable in the short term, the expected increase in the number, intensity and duration of droughts and fires in the coming years is likely to have a long-term negative credit impact, Moody’s said. In a study published in July 2022, the European Commission noted that increased extreme events would lead to additional annual fiscal spending of 4.5% of GDP in Spain, 2.1% in Portugal, 1.7% in Italy and 1.2 % in France.

At the same time, according to Moody’s, droughts and fires will have a significant impact on tourism, which accounts for more than 20% of GDP in Greece, 18% in Portugal, 15% in Spain, 13% in Italy and 9% in France. Therefore, increased exposure to climate change risk is likely to weaken their fiscal and economic strength.

Rising temperatures can also lead to social risks due to health impacts. Spain and Portugal recorded more than 1,000 heat-related deaths in the year to July 19, and fires in southern Europe are the leading cause of air pollution, with serious health impacts. These vulnerabilities are reflected in the agency’s low scores for the environmental and social profiles of Spain, Greece and Portugal, as well as their ESG scores.

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