Countries under fiscal pressure from recent disaster events

Estimates of direct financial losses due to the recent flooding events in Europe range in the billions and will continue to rise due to large-scale indirect effects, such as supply chain, business, and transportation disruptions. Affected countries are now under severe fiscal pressure and many have asked for financial support from the EU to assist in coping with these losses.

One important financing instrument in this regard is the so-called European Union Solidarity Fund (EUSF) established in 2002 after severe flooding in Europe. It is a Pan-European emergency instrument that provides financial assistance to governments following disaster events related to natural hazards. The EUSF was recently expanded to include public health emergencies and is now embedded within the Solidarity and Emergency Aid Reserve (SEAR), which includes the Emergency Aid Reserve. The EUSF will very likely support affected countries with more than one billion euros for public expenditure during the emergency phase this year.

The year 2023, however, also saw several natural hazard events, which prompted countries to apply for assistance from the fund with large payouts. For example, a total of €1,028.54 million in commitment and payment appropriations was allocated to Austria, France, Greece, Italy, and Slovenia to address six disasters that occurred throughout the year.

Recent IIASA research shows that the existing capitalization levels are not enough for coping with such extreme and spatially dependent extremes. While another study indicated that average annual capitalization levels of the EUSF of around €1.6 to €2.1 billion would be sufficient, the recent events have proven that such extreme scenarios (so-called tail events) need to also be taken into account for capitalizing the fund and to make it more sustainable, both today and in the future, under a changing climate.

It was also found that due to the inclusion of health emergencies and other risks, the EUSF, which is embedded in SEAR, is now a multi-risk instrument. This needs special consideration as these risks can influence each other and may cause financing challenges due to negative feedback loops. For example, the research shows that in case of health pandemics such as COVID-19, fiscal pressure is already high, which influences the ability of countries to respond to natural hazards due to factors such as lower financing levels caused by fiscal pressure and less emergency aid arising from decreases in funding from the EUSF (both health and natural hazard aid is taken from the same fund).

Financing the losses incurred by these events causes important opportunity costs, especially if they are done on an ad-hoc basis, in turn necessitating new ways forward regarding multi-risks, fairness aspects, such as contributing to the fund, as well as receiving assistance from it and linking it with proactive-instruments like insurance or risk reduction. These aspects all need to be considered, and possibly strengthened through the establishment of public-private partnerships, to ensure that the right funding mechanisms are in place to fairly and justly address the effects of future natural hazard events in the face of climate change. 

Furthermore, beyond addressing the impacts of disaster events, it is key to consider risk management and adaptation actions to prepare communities and build resilience. In this regard, IIASA has been a partner in the Zurich Climate Resilience Alliance (formerly the Zurich Flood Resilience Alliance), which aims at further fostering climate resilience for more than 70 million people across the globe. Recent work undertaken by the Alliance has identified options for addressing adaptation, protection, and response gaps, as well as suggested opportunities for delivering recovery that enhances resilience instead of ‘bouncing back’ or even 'falling back' after a disaster.

References
Hochrainer-Stigler, S. & Lorant, A. (2018). Evaluating Partnerships to Enhance Disaster Risk Management using Multi-Criteria Analysis: An Application at the Pan-European Level. Environmental Management 61 (1) 24-33. DOI: 10.1007/s00267-017-0959-4 [pure.iiasa.ac.at/14949]

Hochrainer-Stigler, S., Zhu, Q., Ciullo, A., & Reiter, K. (2022). Research for REGI Committee – EU tools to respond to natural disasters. European Parliament, Policy Department for Structural and Cohesion Policies, Brussels [pure.iiasa.ac.at/18002]

Hochrainer-Stigler, S., Zhu, Q., Reiter, K., & Ciullo, A. (2023). Challenges of instruments that should tackle multi-hazard and multi-risk situations: an assessment of the recent reforms of the European Solidarity Fund and the Solidarity and Emergency Aid Reserve. Mitigation and Adaptation Strategies for Global Change 28 (8) e41. DOI: 10.1007/s11027-023-10075-4 [pure.iiasa.ac.at/19043]

Sakic Trogrlic, R., Reiter, K., Ciurean, R.L., Gottardo, S., Torresan, S., Daloz, A., Ma, L., Padrón Fumero, N., et al. (2024). Challenges in assessing and managing multi-hazard risks: A European stakeholders perspective. Environmental Science & Policy 157 e103774. DOI : 10.1016/j.envsci.2024.103774 [pure.iiasa.ac.at/19694]

Hochrainer-Stigler, S., Šakić Trogrlić, R., & Reiter, K. (2024). Multi‐risk instruments for emergency response: a multi‐hazard and multi‐risk assessment of the European Union's Solidarity and Emergency Aid Reserve. Disasters e12650. DOI: 10.1111/disa.12650 [pure.iiasa.ac.at/19875]