At the European Central Bank (ECB), they do not talk about a bubble around AI, but they are already hinting at the term and beginning to imagine such a scenario. A group of economists from the institution has just published an article measuring the eurozone’s exposure to the “AI boom” and describing the different transmission channels to the European economy in case of a stock market crash. They estimate that only eurozone households have invested, often unknowingly, more than 440 billion euros in the uncertain corporate battle around this technology, but the total figure for all European investors is much higher.
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The work, published this Monday on the ECB blog, is titled ‘The AI boom: Rational enthusiasm or the next dotcom bubble?’. It is authored by economists Malin Andersson, Johannes Breckenfelder, Stefano Corradin, Kalin Nikolov, and Maria Antonietta Viola, and between cautions and question marks, it puts figures to the possible problem and issues three warnings.
According to their calculations, the 440 billion invested by European households in the Magnificent Seven is joined by 260 billion from insurers, 200 billion from pension funds, and more than 60 billion from financial institutions. The eurozone totals nearly one trillion euros invested in the big bet on AI. Of that amount, the vast majority, around 840 billion, is channeled through investment funds.
The exposure corresponds to the Magnificent Seven, which are Amazon, Microsoft, Nvidia, Tesla, Alphabet, Meta, and Apple. They are the large listed companies and the ones that most evidently concentrate the race for AI. In the coming months, two other stock market competitors could join, Anthropic and OpenAI, immersed in plans to start trading.
Regarding the economists’ warnings, the first is that “technological revolutions involve cycles of asset price booms and busts that do not depend on whether valuations are rational or irrational.” The second is that European households, insurers, and pension funds have a “significant exposure” to US markets. The third is that an “AI correction in the United States would not be an American problem,” but would spread to the eurozone in the form of deteriorating economic sentiment, financing conditions, and employment.
The authors avoid the word bubble when talking about AI, but they do refer to the “blazing rally” of stock prices and valuations never seen since before the dotcom burst. There is “excessive optimism” and also “concern” about a “correction” in the markets.
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The authors talk about “blazing rally,” “excessive optimism,” and “concern” about a “correction”
In reality, the story is not new. As the authors remind us, major technological advances are usually accompanied by episodes of stock market booms and busts. It happened with the construction of the railroad in the 19th century, with electric companies in the 1920s, or with the emergence of the internet in the 1990s. Investors’ view of AI, they say, is rational, as in previous occasions: “They perceive that a listed company could be the next Google knowing that the environment is very uncertain and, in the worst case, they know they can lose the investment.” That said, they have much to gain.
“This does not mean that current prices are already a ceiling,” the authors assure when talking about the stock prices of tech giants. “If AI proves to be transformative enough, valuations could be even higher in the future,” they continue. “It is impossible to know at what point on the path we are,” they add.
“A correction of the Magnificent Seven is a matter of financial stability for the eurozone,” say ECB economists
What they are sure of is that, if there is a correction, there are contagion channels to the eurozone. The “old economy” listed companies in Europe may be somewhat safer, but stock sales in the United States will be inevitable, and assets may be classified as problematic. “A correction of the Magnificent Seven is a matter of financial stability for the eurozone rather than a private matter,” they state.
The main fear for ECB experts is a shock with effects on the economy. “The worst-case scenario is not the stock market correction alone, but a correction that coincides with broader market instability that authorities cannot easily calm.” Unlike the dotcoms, they conclude, “the current starting point leaves notably less room to cut interest rates or use fiscal policy to cushion the consequences.”
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