Climate change threatens to squeeze Italy’s growth, deepen debt vulnerability

For decades, global warming was treated primarily as an environmental or scientific crisis.

Highlighted by a landmark study from the Euro-Mediterranean Center on Climate Change (CMCC), climate change is now being treated as a sovereign financial crisis.

According to the study released on Wednesday, this rapid change could weaken Italy's long-term economic growth and make its already heavy public debt burden harder to sustain, with output potentially lowered by up to 6% by 2050.

The analysis by the Euro CMCC argues that climate-related damage goes beyond the direct hit to economic activity, affecting government finances by reducing the tax base, increasing debt sustainability risks and pushing up borrowing costs through what researchers describe as a "climate spread".

Without additional mitigation and adaptation measures, Italy's gross domestic product in 2050 could be between 2.2% and 6.0% lower than in a scenario without climate damage, the study found. Even under a more favourable growth scenario, GDP would still be between 1.6% and 4.2% lower than otherwise would be the case.

"We find that climate risk is also a sovereign risk," said Massimo Tavoni, director of the European Institute on Economics and the Environment at CMCC and one of the study's authors.

The growing threat is escalating in others parts of Europe as well.

Europe has been grappling in recent days with an intense heatwave that has pushed temperatures way above seasonal norms and has been linked to thousands of deaths across the continent, underscoring the growing economic and human costs associated with extreme weather.