{"id":237,"date":"2025-07-15T06:39:40","date_gmt":"2025-07-15T06:39:40","guid":{"rendered":"https:\/\/www.worldpumpnews.com\/?p=237"},"modified":"2025-07-15T06:39:40","modified_gmt":"2025-07-15T06:39:40","slug":"the-ecbs-song-of-fire-and-flood-keeps-getting-louder","status":"publish","type":"post","link":"https:\/\/www.worldpumpnews.com\/?p=237","title":{"rendered":"The ECB\u2019s song of fire and flood keeps getting louder"},"content":{"rendered":"<p><\/p>\n<div>\n<p>Stay informed with free updates<\/p>\n<p class=\"article__content-sign-up-topic-description o3-type-body-base\"><span>Simply sign up to the <!-- -->Climate change<!-- --> myFT Digest &#8212; delivered directly to your inbox.<\/span><\/p>\n<p><iframe class=\"article__content-sign-up-iframe close\" scrolling=\"no\" id=\"signUpIframe\" data-prev-url=\"\/register\/in-article-sign-up?ft-content-uuid=79fccf47-7fa7-40e6-8021-630386050e11&amp;concept-id=24ad2c58-14fb-4217-b6f7-7ef88ac51375\"><\/iframe><\/div>\n<div id=\"article-body\">\n<p>Central bankers are more like David Cronenberg than Steven Soderbergh \u2014 they don\u2019t hop around between genres trying to create a quirky feel-good experience, they just stick to what they know and hit you with repeated waves of existential horror. The latest summer blockbuster from the ECB Blog is a perfect example \u2014 if you take a minute to think about what it\u2019s saying, it will chill your spine.<\/p>\n<p>Here\u2019s the jump scare to end them all:<\/p>\n<figure class=\"n-content-image n-content-image--full\" data-component=\"image-set\"><picture><source media=\"(min-width: 700px)\" srcset=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3Abaa6b753-39da-43bb-8dc2-a16be3a37575?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1 1x\" width=\"729\" height=\"542\"\/><img decoding=\"async\" src=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd1e00ek4ebabms.cloudfront.net%2Fproduction%2Fbaa6b753-39da-43bb-8dc2-a16be3a37575.png?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1\" alt=\"\" data-image-type=\"image\" width=\"729\" height=\"542\" loading=\"lazy\"\/><\/picture><\/figure>\n<p>That orange line is a climate risk scenario, indicating a recession which would be roughly twice as bad as the euro crisis, in line with the peak-to-trough in 2008-9 and only exceeded by the COVID-19 shock. It\u2019s taken from the \u201cDisasters and Policy Stagnation\u201d global scenario of the Network for Greening the Financial System, which in aggregate is even scarier:<\/p>\n<figure class=\"n-content-image n-content-image--full\" data-component=\"image-set\"><picture><source media=\"(min-width: 700px)\" srcset=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A5a0751d8-81d7-4056-baa6-4fede997b444?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1 1x\" width=\"938\" height=\"382\"\/><img decoding=\"async\" src=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd1e00ek4ebabms.cloudfront.net%2Fproduction%2F5a0751d8-81d7-4056-baa6-4fede997b444.png?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1\" alt=\"\" data-image-type=\"image\" width=\"938\" height=\"382\" loading=\"lazy\"\/><\/picture><\/figure>\n<p>Where does the scenario come from? Well, it\u2019s not just the normal \u201cpick a number\u201d exercise that you expect from central bank stress tests. The NGFS maintains three models \u2014 a sectoral Computable General Equilibrium one called GEM-E3, a global macro-financial Stock Flow Consistent one called EIRIN and a credit risk model called CLIMACRED. They link up as shown in the diagram below, and between them, they model the effect of shocks on output, the effect on company insolvencies, and the effect of all these factors on global macro variables.<\/p>\n<figure class=\"n-content-image n-content-image--full\" data-component=\"image-set\"><picture><source media=\"(min-width: 700px)\" srcset=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3Aa879d999-617b-45a6-b554-4ed508b12616?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1 1x\" width=\"939\" height=\"323\"\/><img decoding=\"async\" src=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd1e00ek4ebabms.cloudfront.net%2Fproduction%2Fa879d999-617b-45a6-b554-4ed508b12616.png?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1\" alt=\"\" data-image-type=\"image\" width=\"939\" height=\"323\" loading=\"lazy\"\/><\/picture><\/figure>\n<p>What does any of this mean? Let\u2019s oversimplify:<\/p>\n<p>As you can see from the diagram above, the important bit is GEM-E3. For the technical phrase \u201cComputable General Equilibrium\u201d, mentally substitute \u201ca spreadsheet full of supply chains\u201d. That\u2019s not right, but it captures the important intuition \u2014 the purpose of GEM-E3 is that it models the way that the different economic sectors feed in to one another, and how a shock to one percolates through the economy. Because the way that shocks percolate through the economy is partly driven by bankruptcies and partly by financial markets, it needs EIRIN and CLIMACRED to supplement the direct input\/output relationships.<\/p>\n<p>The model deals with two kinds of shocks \u2014 \u201ctransition risk\u201d, where sectors and firms have to change their output plans because of carbon pricing and emissions regulations in order to meet the Paris 2050 targets. And \u201cphysical risk\u201d, where sectors and firms have to change their output plans because they are on fire or under water.<\/p>\n<p>Here\u2019s the really scary thing \u2014 the \u201cDisasters and Policy Stagnation\u201d scenario shown above is a purely physical risk scenario. And it\u2019s calibrated to large but certainly not impossible shocks \u2014 basically a year of twice-a century droughts and wildfires in 2026, followed by a year of twice-in-a-century storms and floods. If you follow through the effects through the sectors, taking into account consumer demand and market reactions, then without a major government support programme, we would be looking at a 5 per cent recession in Europe and North America, more than that in Asia and much more in emerging markets.<\/p>\n<p>Furthermore, look at the dates on the horizontal axis, and consider that the title of the blog post is \u201cNo longer the tragedy of the horizon\u201d. The NGFS technical manual makes it clear that there is no feedback from policy or emissions forecasts into the physical risk scenarios \u2014 this is the 1 per cent tail risk right now, and there\u2019s nothing that can be done to stop the fire and flood if it happens.<\/p>\n<p>It\u2019s not a puzzle why the ECB is publishing these apocalyptic scenarios \u2014 they want the banking industry to be prepared for them too; to have up-to-date flood risk maps and to set aside more capital against loans to borrowers that are particularly vulnerable to weather-based interruption. It\u2019s more of a puzzle why the Federal Reserve and other US regulators decided to leave the NGFS at the start of the year. Even if their climate risk policy is \u201cDon\u2019t Look Up\u201d, they might find that even if you ignore the fire and floods, they may not ignore you.<\/p>\n<\/div>\n<p>#ECBs #song #fire #flood #louder<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Stay informed with free updates Simply sign up to the Climate change myFT Digest &#8212; delivered directly to your inbox. Central bankers are more like David Cronenberg than Steven Soderbergh \u2014 they don\u2019t hop around between genres trying to create a quirky feel-good experience, they just stick to what they know and hit you with [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":238,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[368,370,371,372,369],"class_list":{"0":"post-237","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-ecbs","9":"tag-fire","10":"tag-flood","11":"tag-louder","12":"tag-song"},"_links":{"self":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/posts\/237","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=237"}],"version-history":[{"count":0,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/posts\/237\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/media\/238"}],"wp:attachment":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=237"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=237"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=237"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}