A chilling new warning from the European Central Bank (ECB) has put droughts at the forefront of economic risks facing the Eurozone. According to the ECB, prolonged water shortages driven by climate change could slash nearly 15% off the region’s economic output — a blow that would ripple across vital sectors like agriculture, manufacturing, mining, and construction.
This sobering projection is backed by new joint research with Oxford University’s Resilient Planet Finance Lab, which examined the impact of “an extreme but plausible drought” expected to occur roughly once every 25 years. The findings point to massive potential disruption in sectors deeply dependent on water, with farming highlighted as the most vulnerable. Southern European nations could see up to 30% of their agricultural productivity jeopardized, while even in water-abundant Finland, the risk is still a notable 12%.
Eurozone banks are also exposed. With €1.3 trillion in loans tied up in water-sensitive sectors, the financial risk is substantial. Frank Elderson, ECB executive board member and leading advocate for climate-related financial oversight, emphasized the gravity of the situation. “Losses related to water scarcity, poor water quality and flood protection emerge as the most critical from a value-added perspective,” he said in a recent speech.
He cited the Dutch tulip-growing region of Bollenstreek as a vivid example. Once a symbol of European horticultural heritage, it may become inhospitable for tulip cultivation if current drought trends continue. This year’s spring is on course to become the driest ever recorded in the Netherlands — a stark indicator of what’s to come.
The ECB’s findings are not just about crops and weather patterns. The economic consequences stretch far wider. Water scarcity threatens to jack up costs and interrupt supply chains, particularly in manufacturing. Dry riverbeds hinder hydropower production and block inland shipping routes. And it all cascades into inflationary pressures and financial instability.
This research emerges amid broader global concerns about the degradation of natural resources. A separate report by Allianz, the German insurer, suggests that economic output in the US, EU, and Japan is especially reliant on “ecosystem services” — clean water, fertile soil, and climate regulation. Globally, the loss of these natural assets could shrink the economy by 2.3%.
Yet, despite these mounting risks, climate policy is becoming increasingly politicized. In the U.S., President Donald Trump’s return to the White House has coincided with the Federal Reserve’s exit from the Network for Greening the Financial System. Key financial watchdogs there have also pushed to dilute climate risk disclosure rules, favoring voluntary measures.
In Europe, the political climate is shifting too. The European Commission recently announced plans to significantly scale back its sustainability disclosure requirements for businesses — a move seen by some as caving to regulatory fatigue. Still, central bankers like Elderson remain resolute. He argues that any simplification of disclosure rules must not come at the cost of key data needed to assess risks accurately. His message: climate risk is not a political football but a financial reality that must be tackled head-on.
As the debate continues over how central banks should respond to climate change, one thing is clear: the Eurozone cannot afford to ignore the drying warning signs. Without decisive action, the next drought may do more than wilt crops — it could cripple economies.
