Saturday, August 13

Fires and droughts intensify inflation and harm public finances

The expected increase over the next few years in the number, intensity and duration of adverse environmental events such as droughts and forest fires will have long-term negative credit effects in countries such as Spain, France, Italy or Portugal as a result of the impact on inflation, spending or tourism, according to the agency Moody’s.

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The risk rating agency recalls a study recently published by the European Commission in which Brussels calculates that the intensification of extreme events in a standard scenario of an increase of 1.5 °C will present additional annual fiscal costs of 4.5% of GDP for Spain; 2.1% for Portugal; 1.7% for Italy; and 1.2% for France.

In this sense, he warns that droughts and forest fires “would have important consequences for tourism”, which represents more than 20% of GDP in Greece, 18% in Portugal, 15% in Spain, 13% in Italy and 9% in France.

Therefore, it considers it likely that greater exposure to physical climate risks will contribute to the erosion of the fiscal and economic strength of these countries.

In the case of droughts, Moody’s warns that in the short term they will weaken agricultural production, despite efforts to increase domestic supply, which will translate into greater pressure on food prices.

Likewise, in the midst of an energy crisis caused by the Russian invasion of Ukraine, droughts have also reduced hydroelectric production in Portugal, Spain and Italy by more than 20% compared to the July average between 2015-2021 and slow down the operation of nuclear plants, which require water as cooling.

In this way, the agency points out that higher energy and food prices “will put more pressure on inflation and erode discretionary spending, which in turn will slow economic growth.”

In addition, Moody’s also warns of the higher costs that the public coffers will assume to fight the fires and promote reforestation, as well as to cover support measures for the affected regions, which, although they are manageable in the short term, “the increase expected in the number, intensity and duration of droughts and wildfires in the coming years will likely have long-term negative credit effects.

Likewise, the agency also considers it probable that the increase in temperatures triggers risks of a social nature through its effects on health and recalls that Spain and Portugal registered more than 1,000 heat-related deaths until July 19, while Forest fires in southern Europe are one of the main causes of air pollution, with serious effects on health.



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