ECB Warns of €3 Trillion Economic Risk to Eurozone from Worsening Droughts

The European Central Bank (ECB) has issued a stark warning that intensifying droughts across Europe could cost the Eurozone economies up to €3 trillion, threatening as much as 15% of regional GDP through long-term climate-related disruptions.

A new ECB study highlights that €1.3 trillion in outstanding loans are currently exposed to sectors most vulnerable to water scarcity, including agriculture, manufacturing, mining, and construction. These findings underscore growing concerns about the financial risks linked to environmental degradation and climate change.

According to the Financial Times, the ECB's latest climate risk analysis places strong emphasis on how droughts and water stress could destabilize economic productivity and financial stability. The warning comes amid growing political resistance to green policies and pressure from US officials urging a softer stance on environmental regulation.

ECB Executive Board member Frank Elderson, one of the institution’s most vocal advocates for integrating climate risk into financial oversight, stated on Thursday that water scarcity, declining water quality, and flood protection have emerged as some of the most urgent value-impacting threats across the Eurozone.

He cited a dramatic example from the Netherlands’ iconic tulip-growing region, Bollenstreek, which has become nearly unfit for cultivation due to repeated drought events. Elderson warned that spring 2025 could become the driest season on record for the Netherlands, surpassing levels not seen in nearly 50 years.

Joint research by the ECB and Oxford University indicates that agriculture faces the highest risk from water shortages, with over 30% of agricultural output in southern Europe at risk. In comparison, northern countries like Finland see reduced exposure, estimated at 12%.

A forthcoming ECB blog post further warns that water stress can ripple through the economy, affecting multiple sectors. Drier soils lead to smaller crop yields, manufacturing operations face interruptions and rising costs, and falling river levels reduce hydropower generation and inland water transport capacity.

This research aligns with rising global awareness of the economic risks posed by biodiversity loss and natural resource depletion. A separate study by economists at Allianz, the German insurance group, noted that between 10% and 13% of GDP in the US, EU, and Japan is generated by sectors heavily dependent on ecosystem services such as clean water, fertile soil, crop pollination, and climate regulation.

Allianz warned that degradation of natural systems could shrink global GDP by 2.3%, with soil erosion alone posing significant economic consequences.

The Financial Times notes that debate continues to intensify over how far central banks should go in tackling climate risks within financial systems.

This issue has gained further traction since Donald Trump’s return to the White House and the US Federal Reserve’s exit from the Network for Greening the Financial System (NGFS), which coordinates global climate-related financial policies.

In the US, leading financial regulators have urged the Basel Committee on Banking Supervision to downgrade its climate risk initiatives and shift disclosure rules from mandatory to voluntary.

Meanwhile, Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England, reaffirmed in comments to the Financial Times that central banks must stay the course on climate risk management, regardless of political turbulence surrounding net-zero emissions in the UK.