If markets could sweat, they would be drenched. Europe’s record-shattering heatwave is not just a meteorological curiosity, it is a fiscal event. The mercury hits 47 degrees in Seville; Berlin’s hospitals buckle.
And Britain? Our Met office has dispatched experts to German emergency wards. Meanwhile, the Bank of England sits on its hands, inflation is sticky, and gilt yields refuse to reflect the catastrophe unfolding on the continent.
This is a classic case of market inefficiency. The heatwave is a supply shock. Agricultural output will slump, energy prices will spike, and reconstruction costs will balloon.
Yet the bond market yawns. The 10-year gilt yield barely twitches at 4.3 per cent.
Investors are asleep at the wheel. They forget that extreme weather is a recurring liability, not a one-off expense. The Treasury will have to borrow more to rebuild infrastructure, to shore up the NHS against heatstroke admissions, and to subsidise energy bills.
That means more debt, and ultimately higher yields. But try telling that to a market that is mesmerised by yesterday’s inflation print. The Met office deployment is a red flag.
It signals that British authorities are worried about the UK’s own resilience. If Spain and Italy are melting, the UK is next. Our hospitals are already underfunded, our power grids aged.
The cost of adaptation will run into billions. Where will the money come from? Higher taxes.
Lower spending elsewhere. Or more borrowing. None of these are magic bullets.
The government is trapped between fiscal reality and political necessity. Meanwhile, capital is flight risk. Global investors, already spooked by US rate uncertainty, see a Europe that is physically collapsing.
They will pull money out of European bonds, including gilts, and into safer havens. That will push yields up further, raising borrowing costs for the Chancellor. The irony is that the heatwave is a clear signal of systemic risk.
But the market, in its infinite myopia, treats it as a weather event. It is not. It is a balance sheet event.
The Bank of England should be preparing for a productivity shock. Instead, it is fiddling while the thermometer burns. Expect volatility.
Expect a repricing of risk. And expect the taxpayer to foot the bill. The bottom line: the heatwave is not just hot air.
It is a cold, hard fiscal reality.
