European Central Bank research finds floods can cause lasting regional output losses and expose Europe’s catastrophe insurance gap

The European Central Bank published Economic Bulletin analysis on the economic effects of floods in Europe, arguing that climate change is increasing both the frequency and intensity of extreme rainfall events and that the medium-term impact can extend well beyond immediate physical damage and disruption. The article highlights that floods can affect both supply and demand, making the inflation effect uncertain, with the limited evidence pointing to a short-lived rise in food prices alongside a more prolonged weakening in core inflation as demand softens. Using regional evidence, the ECB finds stark differences by income level: high-income regions tend to see a temporary construction boom, higher investment and higher GDP after floods, with indications of higher total factor productivity, while middle-income regions show no comparable construction surge and a permanent negative shift in the level of industrial gross value added. The analysis also points to spillovers through supply chains, citing evidence from the 2021 Belgium floods where directly affected firms saw sales fall by an average of 15% and where disruptions propagated to firms in unaffected regions and persisted for around a year. On risk sharing and adaptation, the ECB notes that only about a quarter of climate-related damages are insured in Europe, with coverage below 5% in some economies, and references recent ECB and European Insurance and Occupational Pension Authority work on an EU-level approach to bolster catastrophe insurance. It also cites evidence that investing in flood-defence capital can reduce the incidence of flooding two to four years later, while stressing that institutional and financing constraints shape where such adaptation investment occurs.