Chart of the Week : Economic costs of natural disasters Chart of the Week : Economic costs of natural disasters Chart of the Week : Economic costs of natural disasters

Chart of the Week : Economic costs of natural disasters

Christopher Dembik

Head of Macroeconomic Research

Summary:  One of our strongest convictions is that we should get ready for a huge monetary and fiscal climate package, but more likely in 2021 than in 2020.

In today’s edition, we focus on the economic costs of natural disasters based on the data released by “Our World in data”. There is no debate that there are more and more frequent natural disasters in the world. On average, there have been 335 natural disasters per year over the past 20 years, which is twice more than over the period 1985 to 1995. At the same time, the economic cost is rapidly increasing to reach on average $200 billion per year over the past ten years, which is four times more than in the 1980s.

The need for climate adaptations will increase public acceptance for more active fiscal and monetary policy aimed to favor investments in green energy and to prioritize green bonds as part of central banks’ quantitative easing. In the United States, the economist Stephanie Kelton is justifying MMT with climate change.

One of our strongest convictions is that we should get ready for a huge monetary and fiscal climate package, but more likely in 2021 than in 2020.

Over the past months, most central banks have pointed out the importance of climate change, such as Sweden’s Riksbank, or the Reserve Bank of Australia which indicated the world needs to get prepared for repeated (permanent?) climate-related supply side shocks.

Two recent papers have also supported the key role of central banks to face climate change. In a paper entitled “A Role for Financial and Monetary Policies in Climate Change Mitigation” published on the IMF Blog in September 2019, William Oman argues that monetary instruments to promote finance-promoting policies should include better access to central bank funding schemes for banks that invest in low-carbon projects and central bank purchases of low-carbon bonds issued by development banks (such as the EIB in the case of the Eurozone).

In one of her latest speeches delivered in November 2019, FOMC Governor Lael Brainard makes a strong point by stating that climate risks are a core issue that could jeopardize the Fed responsibilities in monetary policy, financial stability and financial regulation.

The ECB is also embracing this issue. We believe the review of the framework next year will be the best opportunity to include climate change. In her latest letter to EP,  ECB Lagarde was bright clear on that subject: “the intended review of the ECB’s monetary policy strategy…will constitute an opportunity to reflect on how to address sustainability considerations within our monetary policy framework”.

There is an emerging debate, especially in Germany, on whether climate change should be part of the ECB’s mandate. If we rely on the Treaty establishing the ECB, the primary objective is clearly defined as price stability. However, it also states that “without prejudice to the objective of price stability, the European System of Central Banks shall also support the general economic policies in the Union with a view to contributing to the achievements of the objectives of the Union”. Among these objectives, it is specifically mentioned that the Union policy prioritizes high quality environment (Article 3 (3) of the Treaty on the European Union).

Based on a strict interpretation of the Treaty, the ECB can play a role to protect the environment (for instance by launching a green QE) as long as it does not enter into conflict with the primary objective of price stability. Considering the level of realized inflation and the level of expected inflation, it is very unlikely that the risk of potentially conflicting goals (climate change and inflation) will be raised anytime soon. As we have mentioned many times on, our main call for the coming decade is that everything is deflationary. If our expectations are proved right, it means that the ECB has virtually plenty of room to support green investments by launching a green QE without inflation shoots out, breaking the 2% level.

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