European Central Bank: AI bubble will have systemic effects

While American companies continue to invest huge amounts of venture capital in their AI data center expansion plans, European authorities are already contemplating the imminent bursting of the AI ​​bubble.

The European Central Bank recently published a new blog post by five economists and researchers arguing that the current “AI boom” will likely leave room for a major correction in financial markets. The AI ​​bubble isn’t just affecting Wall Street and the stocks of the “Magnificent Seven,” the bank says, as European citizens are being exposed to American Big Tech companies, even when they don’t fully understand the connection.

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According to the ECB, current U.S. stock market valuations are near an all-time high. Investors and companies are enthusiastically fueling the AI ​​boom, hoping to achieve unprecedented productivity gains and completely transform the world’s technological landscape. European researchers report that “economic research on past technological revolutions points to a worrying conclusion: a correction in current stock market valuations is likely.”

“The extremely optimistic valuations raise questions: do today’s stock market prices reflect a rational bet on transformative technology? Or are we witnessing a re-creation of the dot-com bubble?” the ECB said.

Europe's leading banking institution highlights how a future bubble could have a significant impact on European citizens as well. Households in the EU are exposed to US technology stocks worth around €440 billion, and many are not necessarily aware of it. In addition, insurance companies and pension funds are similarly exposed to shares of big technology companies.

The ECB compares the current excitement around productive artificial intelligence and chatbots to several notable historical precedents, including the 19th-century railroad boom, the rise of the electricity industries, radio in the 1920s, and the internet boom during the dot-com era. These technologies proved truly transformative, leading to massive increases in the share prices of the companies involved in their development, even after sharp declines in Wall Street valuations.

Even if the AI ​​revolution fuels a turning point in the history of technology, the ECB still predicts a “boom-bust” cycle similar to what happened during the dot-com era. Now that AI investments are so widespread and interconnected, a “bubble” could affect the global economy, not just the US.

We should reconsider the overconfidence in technology, forcing stock prices to fall.

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