The physical and transition risks of extreme weather events in Greece
Principal Investigator: Dr Stelios Sakkas, Senior Research Economist, Economic Research Centre of University of Cyprus
Co-Investigator: Dr Georgios Manalis, Adjunct Lecturer at the Athens University of Economics and Business
Main objectives and motivation
The project investigates how extreme weather events and climate change affect Greece’s macroeconomy and public finances, how these effects spread across specific sectors and economic variables, and in turn investigates policy responses. Its core aim is to quantify economic losses (e.g., GDP impacts), fiscal costs, and implications for the debt burden, while also identifying the main transmission channels that turn climate shocks into broader macroeconomic and budgetary stress.
The topic is especially pressing for Greece as it sits in a climate hotspot, the Mediterranean basin, and faces both chronic climate shifts and more frequent severe events. Long-run changes—such as higher temperatures and reduced precipitation—interact with acute shocks like floods, storms, heatwaves, and wildfires. Together, these risks are already generating uneven impacts across regions and social groups, making climate vulnerability a current and distributional challenge rather than a distant concern.
As known, climate impacts operate through two broad categories of risk. Physical risks include direct damage or disruption to production and infrastructure. In Greece, key exposure points include agriculture (crop and livestock yields), tourism activity, energy adequacy and prices, and the durability of public infrastructure such as roads and irrigation systems. Disruptions in these areas can reduce output, raise costs, undermine competitiveness, and weaken the resilience of local communities and supply chains. Transition risks arise from the economic adjustments required to move toward a low-carbon and more resilient economy. These can influence growth, inflation, and interest rates—channels that feed back into government revenue and expenditure and therefore into fiscal sustainability.
The government response is central in this setup. Climate policy broadly falls into mitigation and adaptation polies. Mitigation instruments (e.g., emissions trading systems, carbon taxes, pollution levies) aim to reduce greenhouse gas emissions and steer private behavior. Adaptation policies aim to reduce vulnerability and strengthen resilience, often through investments in safer and more sustainable buildings, infrastructure, and broader preparedness. However, the key policy tension is fiscal: adaptation may require an upfront increase in public spending, while mitigation revenues may be uncertain or insufficient to fully finance those needs. As a result, even policies that improve long-term sustainability can create short- to medium-term pressure on public budgets—especially relevant in a country like Greece where fiscal space and structural constraints remain important considerations.
Methodology
Methodologically, the research combines an empirical component with a macroeconomic modeling component. Empirically, it compiles detailed weather and climate data for Greece and the wider Mediterranean to identify disruptive events such as droughts, floods, heatwave periods, and related temperature-based indicators (e.g., heating days). The goal is to document stylized facts about the frequency, intensity, and economic relevance of these shocks, with particular attention to agriculture given its relatively large role in Greece compared with many EU Member States and its sensitivity to weather conditions. Further, weather and climate data will allow for the estimation of sectoral output elasticities about weather shocks
The modeling component will build a theoretical framework grounded in recent advances in macroeconomic-climate modeling to reproduce observed dynamics and simulate economy-wide and fiscal effects of weather shocks. Using calibration informed by the empirical results, the model is used to quantify impacts on aggregate variables (GDP, consumption, investment) across different horizons, identify sectoral vulnerabilities (including agriculture and services/tourism, plus implications for prices and land use), evaluate fiscal consequences and policy options (taxation, subsidies, green public investment, and spending reforms), and analyze how uncertainty and systemic risk shape long-run resilience and policymaking.
Policy Relevance
Recent Greek experience illustrates the potential scale of losses. Events comparable to “Daniel,” particularly when they hit the primary sector, can generate sizeable cumulative GDP reductions over multiple years, significant employment losses, and longer-lasting damage if agricultural land or holdings are not restored to production. These types of outcomes highlight that climate shocks can be both cyclical (temporary demand/supply disruptions) and structural (permanent losses in productive capacity), with spillovers from agriculture into non-agricultural sectors via prices, incomes, and linkages. While Greece has improved stability after a prolonged crisis period, the project argues that reducing climate vulnerability should be treated as a strategic priority because remaining structural deficits may limit adaptive capacity.
Overall, the project aims to deliver a systematic, evidence-based assessment of climate-related shocks in Greece, linking granular weather data to sectoral impacts and macro-fiscal outcomes, and translating those findings into insights for mitigation and adaptation strategy under fiscal constraints and long-run uncertainty.
Research Team
Principal Investigator: Dr Stelios Sakkas, Senior Research Economist at the Economic Research Centre of University of Cyprus
Co-Investigator: Dr Georgios Manalis, Adjunct Lecturer at the Athens University of Economics and Business