The Great Divide: Climate-Driven Flooding Widens Economic Gaps Across EU Regions

With growing consensus on the scale of climate change and its direct impacts on societies and economies, the debate on how direct climate damages cascade through interconnected economic systems eventually leading to profound indirect effects remains open amid limited quantitative evidence. The localised nature of climate risk means that regional economies may face stark differences in how they are impacted by the direct and indirect physical risks. In Europe, the world's fastest warming continent, concentrated local damages spill over asymmetrically into tightly-interconnected regional markets, potentially leading to increased inter-regional inequalities despite the continent's prioritisation of economic unity through its regional cohesion policy. Solid regionalized economy-wide analysis could identify if physical climate risks serve as structural drivers of future regional inequality, offering timely insights for policy interventions to curb exacerbating socio-economic adversities. Here, using an empirical dynamic computable general equilibrium model disaggregated to NUTS2 European regions, we explore a range of regional economic projections from two most costly climate-driven hazards: river flooding and sea-level rise. Our methodology captures complex economic feedbacks across granular regions and sectors to estimate both direct and indirect economic repercussions of combined sea-level rise and river flood events by 2100. We find that these climate-induced hazards represent an economically divergent force for the European regions. In contrast to aggregated studies, the resulting regional economic projections reveal wide heterogeneity in combined (direct and indirect) physical risks, with the most affected regions experiencing devastating declines in GDP up to 51% by 2100. Our disaggregated projections of regional economies affected by two climate-induced hazards with different geographical hotspots - coastal and inland simultaneously though unfolding at different speed - allow for detailed evaluation of regional economic inequalities. Low income regions experience by far the highest proportional losses, leading to increases in both between and within-country regional inequality.