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As Flood Waters Recede, Europe Faces the Financial Reckoning

(Bloomberg)

(Bloomberg) -- The tiny Polish village of Romnow is a hive of activity. With the help of soldiers and the local fire service, men, women and children have formed a makeshift production line to pack sandbags one after the other to be loaded onto tractors heading toward the river.

The worry is that a nearby reservoir in the area around the city of Wroclaw will overflow, thrusting water downstream. Residents don’t know how much time they have left to secure their homes and minimize devastation.

“We will load the sandbags until someone from the authorities comes and tells us we have to pack our belongings and leave,” said Marzena, a tax adviser who is one of the 100 or so people living in Romnow.

About 145 kilometers (90 miles) south across the border in the Czech Republic, people in Opava know exactly what their Polish counterparts are trying to avoid.

The city is also bustling, but with people in rain boots carrying shovels. Slippery streets are filled with piles of mud and furniture, toys, clothes, boxes, appliances — everything that can be jettisoned from inundated homes. Flooding engulfed 6,500 buildings.

“It was the worst shock of my life, I could not stop crying,” Lucie Blankova, 36, owner of the Dik a Cau bistro in Opava. She and her employees had put equipment on tables above 1.2 meters to save it, but the water peaked at 1.4 meters inside the building. “Since then, we’ve been cleaning up.”

The scenes encapsulate the drama over the past week as central Europe experienced its worst flooding for decades when summer heat turned into a violent storm. As the shock of what’s still unfolding recedes, attention is inevitably turning to the cost, both economic and political.

It’s too early for concrete figures on the damage from water levels that have left more than 20 people dead. What’s already clear, though, is that the Polish and Czech economies will take a knock and government coffers are going to get more stretched all while ministers try to move quickly to demonstrate they are on top of the crisis.

In Poland, the largest economy in the European Union’s east, Prime Minister Donald Tusk is aiming to avoid spending cuts ahead of a presidential election next year. But the flooding now may lead to a change in the budget, which is already on course for a record deficit in 2025, according to Santander Bank Polska economists. Consumer prices also may be slightly higher, due to crop damage and supply disruptions.

Eager to avoid opposition attacks, Tusk has sought to show he’s all over the rescue effort. Since the flooding started, the main news channels have carried live coverage of his twice-a-day check-ins with his crisis staff in Wroclaw.

European Commission President Ursula von der Leyen is due in the city on Thursday, along with Tusk, Austrian Chancellor Karl Nehammer, Czech Prime Minister Petr Fiala and his Slovak counterpart, Robert Fico.

The Polish government pledged at least 2 billion zloty ($520 million) in immediate aid, with each affected family getting 10,000 zloty to live and then 100,000 zloty or 200,000 zloty to renovate homes. Each time Tusk spoke about the aid, he emphasized that it was free and non-repayable.

“I’m not afraid to say it because I’m sure of this: there will be enough money to rebuild everything after the floods,” Tusk told broadcaster TVP on Wednesday evening. “Both what people and local governments have lost and the damage to infrastructure.”

While flood waters continued to drop in the Czech Republic, thousands of households remained without electricity and some roads and railway lines were closed for inspection and repairs, including a highway link with Poland. Some bridges have been damaged so severely they will need to be pulled down and replaced, according to authorities.

ING Group NV reckons the damage across the country to reach about 40 billion koruna ($1.8 billion), or 0.5% of gross domestic product, with less than a half of the amount covered by insurance. The cost might force the government to raise its budget deficit ceiling, ING economist David Havrlant wrote in a report. The rebuilding effort also could have inflationary effects, he said.

For now, damage assessment is mainly anecdotal. In Opava, a doctor was cleaning up his office with a power wash as wrecked furniture stood outside. He said compared with the last flooding that crippled the region in 1997, the flood water was even higher by a good 20 centimeters. He put his damage at least 500,000 koruna.

Eatery owner Blankova is hoping she can keep the recovery to 1 million koruna, though said “it’s all too fresh.” There were chairs, tables and refrigerators outside, all being cleaned up, though a lot of kitchen equipment was being discarded. The outside seating area was destroyed.

Blankova, who started the business two years ago and was affected by Russia’s invasion of Ukraine, is aiming to get back up and running within a couple of months so she can keep her five full-time employees.

“We opened into a time of instability and fear among people,” she said. “Two years later, when we were getting financially where we wanted to be, the floods came and we have to spend all energy and money on reconstruction.”

The floods also temporarily shut down several Czech power and heating plants and multiple other businesses, including a soft drinks factory in Krnov owned by Kofola CeskoSlovensko AS. The company’s shares fell the most in two years on Monday, but have since recovered most of the losses.

In Poland, the town of Stronie Slaskie, about 90 kilometers south of Wroclaw, estimated its losses at around 1 billion zloty after water swept away a police station and devastated buildings on Sunday.

Wroclaw itself, meanwhile, on the Oder River was trying to make sure it wasn’t hit next. Memories of 1997 still haunt the city of 650,000, when 65% of it succumbed to flooding. With the trauma of the damage, residents were mobilizing on Wednesday to secure their houses, like in surrounding areas.

The peak flood wave reached Wroclaw overnight. The water exceeded earlier predicted levels, but the situation in the city is stable, according to local authorities.

Volunteers had been busy with loading sandbags, a land surveyor was taking measurements of park terrain to determine how many were needed. 

“We will regret it if we don’t step up and do something now,” said Karolina Sulikowska, 36, who took a few days off from her job at a construction company to help with the effort. “What is happening here is a huge mobilization.” 

In reality, there’s little choice but to adapt, according to climate change experts. Central Europe is facing worse downpours as a warmer atmosphere, heated by fossil fuels, holds more moisture, according to Joyce Kimutai, a researcher at Imperial College London.

Weather station data indicate that bursts of September rainfall have become heavier in Germany, Poland, Austria, the Czech Republic, Hungary and Slovakia since 1950, she said.

Lessons have also been learned. While the water level may be higher than the massive flooding from the Oder and Morava rivers in 1997, that disaster led to more than 100 deaths and $4.5 billion of damage. Tusk said on Wednesday that the overall bill now won’t be as big.

The overall human and economic impact also pales in comparison with much deadlier Czech floods in 2002, which inflicted damage worth 2.7% of GDP.

There’s also potentially more money from the EU. Slovenia, which was hit by floods last year, will receive €428 million ($477 million) from the bloc’s Solidarity Fund for reconstruction, which will continue for years to come. The government’s estimate for damage, though, jumped from €500 million to an eyewatering €10 billion.

Indeed, with climate change increasingly an economic issue, some residents in the flood-affected regions hope the influx of money will also lead to better protection.

Back in the village of Romnow, panic broke out at one point on Tuesday evening because of a rumor that a dam at the Mietkow reservoir had broken. Janina, 43, who together with her husband runs a company offering plumbing and electric services, had been confident sandbags would shield her home enough based on what she remembers from 1997.

“But when they said that the dam broke, I thought: the water will flood everything up to the roof,” she said. “We have to run, but actually where to?”

Workers at the embankment next to the village said the flood prevention measures hadn’t been upgraded. But at least there’s a barrier. In Opava, flower store owner Martin, 47, said the city has been waiting for one nearby for years.

“The dam would cost less than all of these damages combined,” he said, sitting in the destroyed garden, wearing muddy work clothes and sipping beer in resignation in the late morning. “I spent 15 years building this up. You try hard, and then it’s gone.”

--With assistance from Maciej Martewicz, Krystof Chamonikolas, Peter Laca, Agnieszka Barteczko, Jan Bratanic, Olivia Rudgard, Piotr Skolimowski and Ben Priechenfried.

©2024 Bloomberg L.P.