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Drought is a natural hazard triggered by a lack of precipitation that can last for several months or years. Droughts can affect a wide range of socio-economic sectors while the related direct and indirect impacts are often difficult to quantify. In this context, drought damage refers to the total or partial destruction of physical assets in the affected area. The main constraint in constructing a robust relationship between the severity of drought events and related damages is the lack of sufficient quantitative impact data. In this paper we propose the use of power-law damage functions to assess the relationship between drought severity and related damages in two economic sectors, namely cereal crop production and hydropower generation, across 21 European countries. The different shapes of the resulting damage functions can be explained by the specific drought vulnerability or adaptive capacity of each sector and country. Due to the scarcity of impact data linked to extreme climate events a bootstrap resampling was performed to assess the potential uncertainties associated with the sample size. This approach helps communicating potential drought impacts and related uncertainties to end users and policy makers in support to the development of drought management plans and long-term adaptation measures.