Resilience budgeting for an age of systemic shocks

We are living in an era of systemic shocks when even wealthy Western nations are not immune to their impacts. Pandemics, earthquakes, wars, terrorism, floods, fires, hybrid threats, economic crises and the increasing impact of climate change continue to challenge states and their ability to recover from them.

Whether they come from state aggression or the impacts of climate change, these shocks are destroying homes, disrupting supply chains and devastating local economies as the scale of these disasters outstrips our existing adaptation efforts.

As these shocks increase in frequency and severity, so too does their cost to our societies – forcing difficult budget decisions onto state entities, which can reduce their ability to deliver other services. Yet while almost every leader supports the idea of building resilience to these shocks, it seldom translates into sufficient funding to support resilience objectives. For years, the focus has been on spending for military capabilities, while a focus on shoring up the foundational underpinnings of our societies has gone underfunded.

NATO identified resilience as an essential dimension of deterrence and defence in the 2021 Strengthened Resilience Commitment and expanded on its importance in the 2022 Strategic Concept and at the 2023 Madrid Summit. While there is a political commitment to resilience, the allies have not yet clearly identified the resources to make it possible.

Budgeting for resilience to these shocks has proven difficult since they often take a back seat to military requirements, seldom fit neatly into normal accounting lines and can be difficult to justify to parliaments. Firstly, government auditors on the lookout for efficiency see spending on redundancies and emergency supply stocks as easy targets for cuts during budget negotiations. Indeed, efficiency is often the enemy of resilience.

Secondly, anti-corruption laws and parliamentary watchdogs can also see spending on backup systems and emergency stocks as fraud, waste and abuse of government spending. So, ministries can find their resilience projects cut before they even come up for a vote in parliament.

Thirdly, even when governments do set aside funding for preventive resilience projects, they are often insufficient to protect against more severe impacts. In other cases, projects face delays or see the money later shifted to other spending priorities – leaving societies vulnerable.

In September 2023, Storm Daniel ripped through the Mediterranean region, taking thousands of lives and leaving billions in damage in its wake.

In the Greek region of Thessaly, 15 died and 73,000 hectares of land were flooded for weeks, devastating a major agricultural region and burying numerous villages. Athens estimated the cost for the damage and victim compensation at €2.5bn, the costliest storm in Greece’s history. While the EU has provided more than €2bn in aid, the costs were still so high that it forced the government to delay certain benefits for pensioners. Costs are projected to rise even further as some stricken villages are now seeking a move to safer ground.

Bulgaria and Turkey were also severely impacted by the storm. In Libya, the impacts were much worse. The severe rainfall caused two dams near the city of Derna to fail, resulting in nearly 4,000 dead, 10,000 missing and 46,000 persons displaced.

For years, engineers had warned of both dams’ vulnerabilities and recommended fixes to shore them up, but successive governments in the conflict-stricken country did not heed them. Further exacerbating the impact was a lack of an early warning system to alert people downstream, something which could have saved many lives.

So far in the 2020s, the costs continue to rise. In the United States, there have been 25 separate weather or climate disasters in 2023 that caused at least $1bn in estimated damages – a new record. These disasters caused $74bn in damages and killed hundreds of people. The previous record was set in 2022.

These increased shocks are also having a severe impact on the insurance market, causing companies to raise premiums or stop insuring homes and properties in certain areas. Five of the largest US property insurance companies have stopped offering coverage altogether in disaster-prone areas impacted by hurricanes and fires. These companies have found their risk calculations are no longer reliable and have decided to reduce their own risk, leaving millions of homes uninsured.

According to Munich Re, these disasters have caused insurance companies to post losses of more than $110bn in the first half of 2023, well above the ten-year average. Their findings also indicate the devastating earthquake in early 2023, which struck Turkey and Syria led to the majority of losses.

According to the European Central Bank, only 25% of disaster losses are covered within the EU; in some member states, it can be as low as 5%. Those down in the 5% range include EU member states that are among the hardest hit by climate disasters: Greece, Italy, Bulgaria, Cyprus, Hungary and Romania.

It’s not only weather and climate-driven disasters that are threatening these insurance markets but hybrid threats like cyber-attacks as well. In recent years, 75% to 100% of maritime insurance policies now include a cyber-attack exclusion clause. Losses caused by cyber-attacks will no longer be covered but other system failures leading to damage will remain covered. While some new cyber-specific maritime insurance policies are now available, these policies have yet to be tested in court. Other industries are facing similar issues to insure against losses due to cyber-attacks.

With the insurance industry in retreat in the face of increased risks due to systemic shocks, the burden has been falling increasingly to the state. Thus, we can expect more demands to be placed on sovereign budgets to cover losses and reconstruction. The state often takes up the mantle as the insurer of last resort since the sooner pay-outs are made and economic activity can restart, the sooner the tax base and basic services can be restored. Within the EU, the disaster insurance gap is also indirectly covered by the Solidarity Fund, among others. Yet, the challenge of providing sufficient proactive resilience funding to address 21st-century shocks remains.

This brings us to an earlier paradox. Efficiency can be the enemy of resilience. But without resilience the system fails, and without efficiency it is not sustainable. Our challenge is to find the right balance.

Developing a balanced approach to resilience budgeting is crucial for several reasons.

Firstly, the 21st century is witnessing an increased frequency and severity of systemic shocks, including hybrid campaigns, natural disasters, pandemics, economic crises and climate change impacts. These shocks can have widespread and long-lasting effects on our societies and economies. In 2022, 70,000 people in Europe died from severe heat and climate change is already causing tropical diseases to gain a foothold on the continent, further taxing stressed health systems.

Secondly, modern societies and economies are highly interconnected and interdependent. A shock in one part of the EU or one sector can rapidly spread and escalate with continental impacts. Resilience budgeting can help us to understand and prepare for these complex interdependencies.

Traditional budgeting methods often focus on immediate needs and short-term planning. Resilience budgeting emphasises a proactive approach, allocating sufficient investments in hardened infrastructure, systems and flexible policies that enhance our ability to withstand and recover from shocks.

Resilience budgeting should also consider the needs of vulnerable populations. Systemic shocks often disproportionately affect marginalised groups, so resilience budgeting needs to include guidelines that promote inclusivity and equity.

In summary, a new approach to resilience budgeting is essential to prepare for and mitigate the impacts of systemic shocks, which are growing in frequency and severity. It represents a shift from reactive to proactive planning, emphasising long-term sustainability, adaptability and a holistic understanding of interdependencies. So, where do we start?

First, we start with risk reduction. Governments don’t buy insurance, they are insurance. In order to overcome the various bureaucratic obstacles to budgeting for resilience, we need to start thinking of it as insurance. The most cost-effective place to start is by spending on prevention and risk mitigation. According to the US Federal Emergency Management Agency (FEMA), “every $1 spent on mitigation saves $6 in future disaster losses.”

Flood mitigation efforts save farms and villages all over the world from devastation, but they require a dedicated effort to resource and build them. The same goes for reliable communications. A hardened or redundant communications system is more likely to be reliable during a crisis, but it will always cost more than one that is not. However, none of this proof may be enough to get past parliamentary auditors looking for waste and corruption. At a time when experts are telling us that our adaptation efforts are insufficient to address future hazards, this situation must be changed fast.

One solution could be to set aside a national resilience budget built on a similar model to the European Union’s Recovery and Resilience Facility (RRF) enacted during the coronavirus pandemic. Such a budget could be provided to the government and overseen by a combined ministerial, parliamentary and citizen group to vote on and approve resilience project proposals from each ministry and municipality. This way the process would be transparent and the responsibility for spending on resilience could be shared across ministries, the parliament and the people.

Next is investing in early warning systems. According to the Global Commission on Adaptation, the ability to provide even 24 hours’ notice of an impending hazardous event can reduce damage by 30% and save thousands of lives. According to the UN, investing just $800mn in such systems in developing countries could prevent losses of $3bn to $16bn every year.

A number of EU member states have enacted these kinds of systems, such as Romania’s RO-alert, which provides early warnings to citizens on all types of crises and disasters via their mobile phones.

We are stronger together. Recent history has taught us that we are only as resilient as our neighbours since pandemics, disasters, disinformation and cyber-attacks sprawl across borders and impact our supply chains, basic services and social order. For this reason, our resilience budgeting efforts cannot stop at our own borders. Cross-border cooperation, information sharing, cooperative resilience exercises and risk assessments can help us to be prepared to face future systemic shocks together.

Both the EU’s Civil Protection Mechanism and NATO Euro-Atlantic Disaster Response Coordination Centre include neighbouring partner countries. This has resulted in increased crisis response capacities, but resilience capacity gaps remain, especially in the Western Balkans and Black Sea region. Addressing these gaps collaboratively should be an important aspect of any regional cooperation in the coming years.

Finally, the EU already has a potent tool to enable preventive resilience spending in the form of the RRF, but a few changes are still needed. Firstly, the RRF has rightly been focused on economic and social resilience in the face of the recent pandemic. It has also emphasised spending on achieving carbon neutrality in the green transition but less on adaptation and resilience – two terms that may soon merge as the climate emergency continues.

To support member states in the face of Russia’s ongoing war in Ukraine, Russian hybrid campaigns in Europe and the increased severity and frequency of climate-driven disasters, it will need to also address broader resilience needs.

These include building resilient communications, energy and transportation systems that can withstand shocks. Strengthened health systems that can address mass casualty situations, cyber defence and risk mitigation measures to prevent the worst devastation from climate disasters.

Since the demand for this type of broader resilience funding will only increase in the coming years, the EU should consider not only modifying but extending the RRF mandate well beyond the 31 December 2026 expiration date. In the end, it could be among our most powerful tools for resilience as the war in Ukraine rages on and global temperatures look set to break the 1.5°C target set in the Paris Agreement.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.