Scenario Analysis

 

Will future crises be induced by financial or climate-related events and what is their respective likelihood? For our first module, we worked on scenarios analysing potential causes of future crises as the basis of our project. The aim was to better understand potential sources of disturbance that might translate into a fully-fledged economic crisis. We commissioned two reports pre-COVID 19: one on potential financial crises and the other on climate impact induced crises. Both are crucial in understanding how the current crisis develops and where future crises might emerge. Even after the breakout of the COVID 19 crisis, these two scenarios remain central for our understanding of systemic vulnerabilities.

The first scenario analysis,The COVID-19 financial crisis”, highlights the emergence of the shadow-banking system and the high levels of corporate debt. It further analyses the shift from bank-based to market-based finance in Europe and shows how the global economic lockdown nearly brought down the global financial system in March 2020.

In the second scenario analysis on Impacts of climate induced crises, we look into climate impacts that can trigger social, political, economic or financial crises in Europe. The report identifies six scenarios that are initially rather unlikely but become more probable each year such as: Major river flooding in central Europe or coastal defence failure during a major storm surge in western Europe, causing hundreds of billions in damages. Or prolonged drought in southern Europe leads to crop loss, decreased tourist arrivals, and conflict between water users. Social unrest exacerbates the economic impacts leading to economic crises.

The multitude and simultaneity of crises add enormous complexity to the politics of climate change and financial regulation. For these reasons, our third scenario report examines the political way ahead. Together with the European think tank E3G, “Transformative policies on a bumpy road” provides an analysis of past and present crises in the financial and ecological system. Based on what these experiences taught us, we sketch how resilient responses to present, and upcoming crises could look like. Although systemic crises have become a common feature of our time, political responses still lag behind, and mistakenly try to restore an old “normal”. Instead of reacting, we need policies of resilience that identify vulnerabilities and eliminate them. Furthermore, crises should be recognized and used as rare opportunities for political change and transformation. Beyond the economic and environmental challenges, that have been addressed in the two previous publications, this paper draws on the political obstacles to the transformation and suggests a way out.

 

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