Extreme heat in Europe: Which countries face the biggest costs?

Extreme heat could become a major drag on growth in Europe's largest economies, driven by falling labour productivity and rising demand for cooling, according to a new report by Allianz Trade.

By 2030, cumulative GDP losses could reach 5% to 7% in the countries most exposed to rising temperatures. France tops the European ranking, with potential losses of $240 billion (€209bn) over the next five years, according to Allianz.

Italy is the second-most exposed European economy, with projected losses of $147 billion (€128bn), followed by Germany at $131 billion (€114bn) and Spain at $120 billion (€104bn). By comparison, cumulative losses in Japan could reach $354 billion (€308bn).

To assess the potential economic cost, researchers assumed that countries would experience a steady rise in extreme heat between 2026 and 2030, culminating in conditions similar to their hottest year on record. This was based on the five hottest years each country recorded between 2014 and 2024.

The findings echo concerns raised by the European Central Bank. Speaking at the Climate, Nature and Monetary Policy Conference in Frankfurt in May, ECB Chief Economist Philip R. Lane said that "global warming and the increase in extreme weather events cause substantial economic damage".

Lane added that recent research suggests global GDP per capita would be more than 20% higher today had no warming occurred between 1960 and 2019. This corresponds to a 0.3% reduction in the annual growth rate over this period.

Lost productivity and rising energy demand

Construction workers, factory employees, delivery drivers and agricultural labourers are increasingly losing productive hours during heatwaves, while businesses face rising cooling costs.

Construction workers, factory employees, delivery drivers and agricultural labourers are increasingly losing productive hours during heatwaves, while businesses face rising cooling costs.

According to Allianz Trade, once temperatures exceed 30°C, labour productivity falls by around 3% for every additional degree, while energy demand rises by roughly 1.2% per degree as households and businesses rely more heavily on cooling.

The report attributes productivity losses to physical strain, cognitive impairment and poorer sleep caused by extreme heat.

Globally, the share of working hours lost to heat stress is projected to rise from 1.4% in 1995 to 2.2% by 2030, with much higher losses in South Asia (5.3%) and West Africa (4.8%), according to Allianz Trade.

Heat also puts pressure on energy systems. Above 30°C, electricity demand rises sharply, while generation capacity can come under strain. Europe's power mix still relies heavily on thermoelectric generation — gas (51%), nuclear (18%) and coal (17%) — all of which depend on water availability and cooling efficiency.

During France's 2019 heatwave, for example, nuclear output was reduced because of cooling constraints, tightening supply and triggering sharp spikes in electricity prices.

Transport infrastructure is also vulnerable. High temperatures can damage roads and railways, leading to service disruptions and higher repair costs.

Rising temperatures could weigh on growth and public finances

The report warns that the economic impact of extreme heat extends well beyond lower productivity.

Investment is expected to take a larger hit than consumer spending, with fixed capital formation declining by an average of 8% across affected countries. As heat reduces expected returns on investment, businesses scale back spending, weakening future productive capacity and creating a self-reinforcing drag on growth.

Allianz Trade also expects heat-related shocks to generate stagflationary pressures, with inflation rising alongside unemployment. This could leave central banks facing difficult trade-offs, particularly in the eurozone, where a single monetary policy must serve economies with very different levels of climate exposure.

Public finances are also expected to come under strain. Lower economic output reduces tax revenues, while governments face higher spending on inflation-linked benefits, healthcare and emergency infrastructure repairs.

Annual tax revenue losses could reach 1.8% in France, 1.3% in Italy and Spain, and 0.7% in Germany. Fiscal balances are projected to deteriorate by around 0.5% of GDP per year on average.

According to the report, Italy and Spain risk breaching the EU's Maastricht deficit limit once heat-related pressures are taken into account. France, already projected to run a budget deficit of 4.9% of GDP, could face an additional heat-related fiscal burden equivalent to 2.2% of GDP.

How prepared is Europe?

Allianz Trade finds that no major European economy is fully prepared for the economic consequences of extreme heat.

Spain comes closest on worker protection, while France leads on heat-resilient building standards. However, the report concludes that no country currently combines comprehensive protections for workers, buildings, public finances and vulnerable households.

Most European countries have adaptation strategies in place, but few have committed long-term funding to support them. Instead, governments often rely on emergency spending after heatwaves occur.

The EU has committed to cutting greenhouse gas emissions by at least 55% by 2030 under its Fit for 55 package, with the aim of reaching climate neutrality by 2050. Brussels argues that the transition will not only help tackle climate change but also strengthen the bloc's economy by reducing dependence on imported fossil fuels and improving resilience to climate-related risks.

Allianz Trade argues that households could also play a role. European households hold nearly €40 trillion in financial assets, but many homes are still poorly equipped for hotter summers. Incentives to improve insulation, install cooling systems and expand insurance coverage could help reduce the impact of extreme heat.

However, the report warns that lower-income households are often the most vulnerable to heat and may not be able to afford these upgrades. That means government support will still be needed to ensure adaptation efforts do not widen inequality.