Study regionThe Guadalquivir Basin in Spain as a representative Mediterranean basin. Study focusThe aim of this study is to assess the adaptive capacity of Mediterranean basins to long periods of severe drought. To do so, a hydro-economic model has been developed that includes a spatial representation of the major economic uses of water and enables an analysis of the economic and environmental effects of alternative water management policies under a single event of water scarcity. New hydrological insights for the regionResults highlight the trade-offs among economic uses of water and environmental flow requirements since water resources in the Guadalquivir are fully allocated. Moreover, the increase of irrigated perennial crops area will aggravate vulnerability to drought by limiting the adaptive capacity of the basin. Survival irrigation is the first option for farmers to adapt to the simulated extreme drought. 148,000 ha are shifted from normal irrigation to survival irrigation in the Drought Management Protocol scenario. These findings call for policy interventions to ensure greater management flexibility toward optimising water use while meeting environmental goals. For instance, enabling water trading among farmers would reallocate 22 % more water to the upper basin, reducing drought losses by 22 M EUR. The hydro-economic model developed here can be adapted to basins elsewhere and the results show that it can be a useful tool to guide the design of efficient water management policies to address severe droughts in water-stressed basins.