Europe risks financial crisis if AI bubble bursts, warns ECB
A US tech crash is likely and it could trigger a financial crisis in Europe, central bankers have warned.
Analysts at the European Central Bank (ECB) said the AI boom that had driven Wall Street valuations to nosebleed levels has left the eurozone exposed.
European households have €440bn (£380bn) invested in US tech stocks, mainly held in investment funds tracking stock market indexes. It means that a plunge in equity markets could prove very painful on the Continent.
Pension funds and insurers are also highly exposed to the seven most valuable US companies, a group of tech companies colloquially known as the "Magnificent Seven" or "Mag 7".
This means a big crash in US stocks could trigger fire sales of other assets, the analysts warned.
In a blog post, ECB analysts said: "A sharp correction can force funds to sell assets to meet redemptions, first, liquid holdings and then, if the correction persists, distressed assets, pushing valuations down further and triggering more redemptions.
"This is why a Mag 7 correction is a question of financial stability for the euro area."
The warning came as Nvidia said it would invest more than $100bn (£74bn) in a huge new data centre for OpenAI in Ohio. The facility could become one of the world's largest.
The US giant will provide credit capped at $105bn for the data centre, a sum intended to backstop the development expected to house more than one million of its AI chips.
However, the deal will add to concerns about so-called "circular financing" in AI, whereby companies such as Nvidia loan money to their customers, or invest in them, so that they can buy its products.
Sceptics argue that this is unsustainable. Concerns have been raised about what will happen to sky-high stock valuations if usage of AI fails to match expectations, which underpin the massive levels of spending.
The ECB warned that a sharp fall in stocks was probable. In a blog post, analysts said: "Economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely."
If stocks in the largest US tech companies, such as Alphabet, Nvidia and Apple, nosedive, it would be "a question of financial stability for the euro area", the analysts said.
They added: "The effects of a US correction could extend beyond financial markets to euro area sentiment, financing conditions and hiring. A US AI fallout would not remain a US problem."
The S&P 500 has jumped by more than 20pc in just a year, buoyed by an AI spending frenzy and strong earnings reports.
The ECB said US stock market valuations were close to their historical peak, when measuring the cyclically adjusted ratio of prices to earnings developed by Robert Shiller.
Analysts said: "The extremely optimistic valuations raise questions: do today's stock market prices reflect a rational bet on the transformative technology? Or are we seeing a remake of the dotcom bubble?"
Even if the high valuations are justified, a correction should still be expected as AI becomes more widely adopted across the economy.
"The exact timing is unknowable in advance. These boom-bust patterns are only identifiable with hindsight," ECB officials said.
The ECB is far from the first central bank to sound the alarm about US tech stocks. The Bank of England has issued several warnings regarding the risk of an AI bubble, claiming that a crash could plunge the UK deep into recession.
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