Severe droughts are squeezing Europe's economy, from crops to shipping patterns : The Indicator from Planet Money Even the sheep are complaining. A severe drought is drying Europe to its limits, and the effects are widespread. From crops to shipping energy, what are the economic consequences?

The drought in Europe

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC'S "WAKING UP TO THE FIRE")

WAILIN WONG, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

PADDY HIRSCH, HOST:

And I'm Paddy Hirsch. Europe is having a tough time right now. There's a war going on right on its doorstep. Its main source of fuel, Russian gas, is in danger of being cut off. And it's suffering from one of the worst droughts the region has experienced in as much as 500 years.

WONG: And this is no ordinary drought. It's so severe that it's causing blackouts and wildfires. It's threatening crops and livestock, disrupting nuclear power plants, menacing historic buildings and drying up the continent's waterways.

HIRSCH: Yeah, water levels have actually dropped so low in some rivers that they've uncovered these so-called hunger stones. These are rocks laid centuries ago during periods of severe drought. And they're inscribed with legends like (speaking German) - if you see me, then weep.

WONG: Is there a German word for, you know, catastrophic climate anxiety?

HIRSCH: I'm sure there is, but it's probably a really, really long word, and I couldn't pronounce it anyway.

WONG: Today, we're going to take a look at Europe's drought - what's happening there, how it's affecting the economy and what it means for the U.S. That's coming up after the break.

(SOUNDBITE OF MUSIC)

HIRSCH: If you want to get a sense of how the hot weather is affecting Europe, just have a look out of Phil Stocker's window.

PHIL STOCKER: Well, if I look at my window now, I mean, there is a tinge of green, but it's a very brownish green. It looks - it just looks dry.

HIRSCH: Phil is a small-holding sheep farmer. He's also head of the U.K. National Sheep Association.

STOCKER: We probably had - last had rain about two months ago, although not a great deal. And that growth is now just turning to - well, it's dying in front of our eyes, really. It's almost like standing hay, really.

WONG: In a normal year all over Europe, whether in Britain or Italy or France, farm animals like Phil's sheep would be fattening themselves up on lush, green grass right now. But thanks to the drought, there is no grass in many parts of Europe.

HIRSCH: Yeah, and to keep their animals alive, many farmers are now being forced to buy alternatives like grain, which is rising in price due to the war in Ukraine. Those costs - along with labor shortages, rising energy prices and disease outbreaks - have contributed to a 12% increase in meat prices in the European Union. That is the highest on record.

WONG: It will rain again in Europe, of course. But Phil says the drought today is creating a highly negative knock-on effect throughout the agricultural economy.

STOCKER: People are stunned - in some cases to eat into their winter forage stocks as well. So, you know, we could end up with a real problem this winter. I think people will be desperately scratching around trying to, you know, get grazing elsewhere, I guess. And costs will go up.

HIRSCH: It's not just a lack of water in the ground that's hurting Europe. It's also a lack of water in its rivers. That threatens fish and wildlife populations that live in or close to those waterways. It also limits supply to the irrigation systems that water everything from wine grapes and Arborio rice fields in Italy to olives and strawberries in Spain.

WONG: Low river water levels aren't just an agricultural issue. Robin Brooks is the chief economist at the Institute of International Finance. He says the unusually low level of one of the EU's longest rivers, the Rhine, is hurting a bunch of industries that depend on the waterway to transport goods and equipment.

ROBIN BROOKS: Barges that are running in many cases to factories that are upstream are only able to run at something like 25-, 30% capacity because otherwise they run too deep and could run aground.

HIRSCH: The Rhine is hugely important to the European economy. More than 300 million tons of goods are shipped along it each year between Basel - where Switzerland, Germany and France meet - and the North Sea.

WONG: This isn't the first time the Rhine has dropped to dangerously low levels. During the 2018 drought, the river became so shallow that shipping traffic was stopped for several weeks. That trimmed Germany's industrial output by about 1 1/2%, roughly $12 billion.

HIRSCH: But here's the difference between then and now. Back in 2018, Europe wasn't just coming out of a pandemic. It didn't have a war on its doorstep, and it wasn't facing an energy crisis. The timing of this drought couldn't be much worse.

BROOKS: It is the straw that is breaking the camel's back. It is hurting supply chains when those are desperately needed.

WONG: And the supply chains that Robin is talking about aren't just those for factory goods and equipment.

BROOKS: Barge traffic is an important energy supplier, so the barges typically take coal and other commodities upstream.

HIRSCH: That's coal that supplies coal-fired power plants throughout the country. The Rhine is also used to ship gasoline to gas stations, which are in increasingly high demand as shippers shift to road transportation from the river. And if the U.S. does end up shipping natural gas to Europe to offset supply shortfalls from Russia, the Rhine would be a key conduit for that supply.

WONG: Water levels in the river are expected to rise a little bit this weekend, but the pressure on the Rhine will likely persist until the drought ends. That is squeezing Germany, where most of the Rhine flows, and by extension, the whole of Europe.

BROOKS: Ordinarily, in a normal year without the invasion of Ukraine by Russia, these would be footnotes. But at the moment, they really matter. And so that's why the drought, I think, is a first-order issue.

WONG: And not just a first-order issue for the EU, but for all of its trading partners too. Robin says if drought like this is going to be a regular feature of the European summer, the cost of doing business in Europe and the cost of trading with European nations could rise in various ways.

HIRSCH: Yeah, insurance costs for U.S. companies could go up as it gets harder to predict shipping patterns. It could also get more expensive to borrow - not just for companies but even for the most advanced countries which usually benefit from what economists call the risk-free rate. That's the rate of interest on the safest government bonds.

BROOKS: We are living in a less predictable, more unsafe environment globally. And so climate change may push this risk-free rate up, and that would be a material disadvantage for many, many people - not just businesses but also consumers.

WONG: Price increases could come to the U.S. in different forms, but the most immediate and obvious, Robin says, will likely arrive in the form of fuel costs.

BROOKS: Energy markets, to a large extent, are global. So what happens, for example, in Europe in terms of substitution away from Russian energy? If demand from gas goes to oil, that will impact global oil prices. And so that's, you know, going to hit Americans at the pump.

HIRSCH: So far, the effects of the drought haven't made it across the Atlantic. And if the weather breaks soon, it may not. Until then, though, Europeans are suffering, including Robin's parents, who live near Frankfurt in Germany.

BROOKS: They've never seen anything like it. I mean, people are huddled in their houses. No one has air conditioning because this kind of thing is very, very rare. And so people are scratching their heads. And, of course, the million-dollar question is, is this climate change? Is there more of this coming?

WONG: Whatever the answer, Robin says Europe can't shrug off the situation as it did the last time drought menaced the continent and dried up the Rhine back in 2018.

BROOKS: I think there's greater urgency. I think there is a great opportunity, especially for Germany here, to retool some of its manufacturing and energy processes. Obviously, there's a major shift away from Russian fossil fuels that will hopefully be completed by 2024. As part of that, there will be a large LNG infrastructure. Rivers will be a key part of that. And so there is a huge, vested interest in Germany to make this work.

HIRSCH: In the U.K., our sheep farmer Phil Stocker says farmers like him are also working to make themselves as flexible as possible right across Europe to prepare for whatever the weather throws at them in the coming years. That means being creative with plant and soil management to ensure feed supplies and coming up with solutions to protect livestock from what are likely to become increasingly harsh and unpredictable elements.

STOCKER: Many, many farmers out there at the moment aren't quite sure what's happening, what's going to happen. And managing things and making changes to your business when you're just not quite certain how - to what extent things are going to change is really quite tough. But having said that, our sheep farmers are a resilient bunch, and they've adapted and changed and evolved for - over many generations.

HIRSCH: Yeah, they are resilient, rather like the animals themselves.

STOCKER: They absolutely are. They share some of the same characteristics, I guess. They are a very resilient bunch. There's no doubt about that.

HIRSCH: Maybe that goes for Europeans generally. Let's hope so.

(SOUNDBITE OF MUSIC)

WONG: This episode of THE INDICATOR was produced by Jamila Huxtable with engineering support from Robert Rodriguez. Kathryn Yang checked the facts. Our senior producer is Viet Le. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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