How vulnerable is Europe to severe climate-related natural disasters abroad? A dynamic CGE analysis of the international financial and economic impacts of a large hurricane in the southern USA

The European economy and financial markets are closely connected to the US economy and financial markets through trade and investment flows. Severe natural disasters in the US may not only have economic and financial impacts in the US but also have spill-over effects on Europe, especially under the increasing climate risks. This paper contributes to the thin literature that focuses on the international financial and economic impacts of natural disasters. We adopt a recently introduced climate storyline approach, which is an event-based approach aiming at building “physically self-consistent unfolding of past events, or of plausible future events or pathways”, to estimate the financial and economic impacts of natural disasters. Specifically, we first estimate the economic damages of downward counterfactuals of three hurricanes (Harvey, Irma and Maria) that struck the southern US in 2017.Downward counterfactuals are plausible alternative realizations of historic events that would have been much more impactful than the actual event. We estimate that total damage due to the three hurricanes could have been half a trillion USD in the worst case scenario. We then use a dynamic global equilibrium model to assess how financial and economic impacts on the European Union unfold over time. The results show small but material effects on the European economy, , with marked differences between economic sectors. On the production side, manufacturing sectors (petro-chemicals and other manufactures) increase their production by around 0.1% in the short term. The activity of the construction sector in the EU falls by up to 0.6% for about a decade, as do domestic investments. This has a small but negative impact on economic growth in the European Union. We show how these effects are related to the initial physical damages as well as to the economic responses that are likely to follow after the disaster.