From Shocks to Structure: Climate-Related Losses, Fiscal Sustainability, and Risk Governance in Europe

Climate-related economic losses across Europe have evolved from isolated environmental shocks to persistent, structurally embedded fiscal risks, posing a direct challenge to the long-term fiscal sustainability of European states. This study presents an empirical framework for diagnosing and quantifying this transformation across 38 European countries between 1980 and 2023. Combining regime-switching time-series models with a two-part panel design, we identify temporal shifts and spatial asymmetries in loss exposure. Our findings reveal the emergence of a high-loss regime from the early 2000s, alongside a widening inequality in national vulnerability, with countries such as France, Germany, Italy, and Spain bearing a disproportionate burden. This concentration raises critical questions about the sustainability and equity of current EU risk-sharing frameworks. The two-part model further disaggregates the probability of experiencing losses from their conditional magnitude, enabling country-level estimates of expected annual losses. These results highlight the limitations of current fiscal instruments, which remain reactive and fail to align with the spatial and temporal dynamics of climate risk. We argue for a shift from climate loss management to climate loss governance, underpinned by predictive analytics, differentiated policy tools, and a reorientation of EU fiscal solidarity mechanisms. By quantifying, measuring, and spatially disaggregating climate-related fiscal exposure, this study contributes directly to the sustainability agenda: it demonstrates that climate losses are no longer exogenous disruptions but endogenous features of the European economic landscape that must be integrated into sustainable development planning, fiscal governance, and EU-level adaptation policy.