This summer's heatwaves, droughts and wildfires were a warning. Their economic impact has so far been limited, but the costs of climate change are rising and future shocks may be harder to absorb. Europe needs better protection against the financial fallout of climate change and a more flexible energy system that makes the most of clean power.
This summer's record-breaking heat was above all a human and environmental tragedy. Over 30,000 excess deaths were recorded across Europe during the heatwaves. Wildfires burned 400,000 hectares in Spain and France, and the drought lowered water levels in major rivers such as the Rhine and the Danube, disrupting key shipping routes and the cooling of nuclear power stations.
In the words of European Commission President Ursula von der Leyen, it was a "summer of truth".[1] Von der Leyen, U. (2026), "2026 State of the Union Address by President von der Leyen", European Commission, 16 September.
The costs go beyond the immediate damage
ECB staff estimate that this summer's extreme weather has had only a small and temporary effect on euro area activity. In Germany, most of the impact of the record-low waters in the Rhine on GDP growth is expected to reverse once river flow normalises. In Italy, output will suffer because of the searing heat and lack of rainfall, while in France and Spain the effects of extensive wildfires have so far been concentrated mainly in agriculture, forestry and tourism.
But the near-term picture understates the risks as the climate keeps warming. The euro area's exposure is broad: nearly three quarters of euro area businesses depend heavily on at least one service provided by nature, with water-related services the most exposed. And climate-related shocks can leave lasting scars on affected regions, increasing economic volatility and amplifying the effects of other shocks.
On average, economic activity in affected regions is 1.5% lower two years after a heatwave, and 3% lower four years after a drought, driven in part by lower productivity and people relocating. The arid summer conditions have also severely worsened prospects for agricultural supply in Europe and could push food inflation higher in the coming year.
Heat and drought are not the only threats. Nearly 12% of euro area economic output is exposed to risks linked to insufficient flood protection, which can lead to devastating losses like those experienced in Spain and many other places in Europe over the past years. Recovering from such losses is not simple. Historically, only a quarter of catastrophe losses in Europe have been covered by insurance, meaning households and businesses often bear the brunt of the cost unless fiscal authorities are called to a rescue that they can no longer afford.
Clean energy cushioned the energy shock, but the heat tested it
The energy shock from the war in the Middle East coincided with this summer's heat and the two interacted.
At the beginning of 2026, wholesale electricity prices reacted less to rising gas prices than in the 2021-22 crisis, in large part because many euro area countries have increased their low-carbon electricity generation, particularly through renewables. Spain is a notable example. The share of hours in which gas plants set electricity prices has fallen from around 80% in 2020 to just above 20% in 2026, based on the first nine months of each year.
Yet a warming climate can erode some of that protection. Heatwaves and drought added to the price pressures from the conflict. Electricity demand rose as people and businesses relied more on air conditioning, while low water levels reduced hydropower and limited cooling water constrained nuclear capacity. Together, these factors pushed up wholesale electricity prices and reduced the potential for renewable and nuclear energy to cushion higher fossil fuel prices.
The heat did not hit all power sources equally. During the heatwaves, solar was the only major power source to perform better than usual. Supply was tightest and prices highest in the evenings, when solar output fell but demand for cooling stayed high. This points to the need for a more integrated and flexible energy system, able to move cheap solar power to where and when it is needed.
Three priorities for Europe
Europe's response needs to address both the direct hit and the energy channel.
First, as extreme weather becomes a regular feature of our summers, Europe must proactively prepare and be better protected against its financial fallout. The Commission's EU Framework for Climate Resilience offers a systemic response to increase climate protection across all major policy areas and improve the availability and usability of data, and creates an opportunity to take forward a proposal by the ECB and EIOPA to increase climate insurance coverage with an EU-level public-private reinsurance scheme.
Second, Europe needs a power system that makes the most of cheap, home-grown clean electricity. The Commission's Electrification Action Plan rightly aims to double electricity's share of final energy consumption by 2040, but this will only pay off if grids and storage keep pace. Each euro invested in upgrading the grid saves more than €2 in other system costs, and storage would help carry cheap solar power into the evenings, when heatwaves strain supply most.
Third, as building out the grid will take time, Europe should make it easier for firms to supply themselves in the meantime. Factories are installing their own solar panels and batteries to cut costs, and with new grid connections taking between two and ten years, data centres are bringing their own generation and storage. Common EU rules could let firms with their own "behind-the-meter" supply, generated and stored on site, connect sooner in return for supporting the grid when it is under strain.
Much of this investment will have to come from the private sector. Completing the savings and investments union and maintaining a stable climate policy framework, including carbon pricing, would make it cheaper to finance.
The COP31 summit in Antalya, which begins next week, is an opportunity to turn ambition into action on a global scale. This summer will not be the last of its kind. Extreme heat will return more often and with greater force, and its costs will fall hardest on those least able to bear them. Europe has the means to limit the damage, and we owe it to the generations who will live with these summers to use those means now.
