Rising market optimism around Artificial Intelligence and alarming levels of public debt could pose a risk to the financial stability of the euro zone, the European Central Bank (ECB) has warned.
“Financial markets, in particular stock markets, remain vulnerable to sharp adjustments due to persistently high valuations,” the ECB said in its regular review of the single currency bloc’s financial stability.
“Market confidence could change sharply, not only if growth prospects deteriorate, but also if the profits of the technology sector, especially those of companies related to Artificial Intelligence, do not meet expectations.”
US stock markets have reached successive all-time highs, recovering from the sharp drop recorded in April, after US President Donald Trump announced tougher tariffs, which were later partially withdrawn.
However, gains have been mainly concentrated in technology companies such as AI chip designer Nvidia, raising fears of an enthusiasm-fuelled bubble that could burst.
In a conference call with journalists, ECB vice-president Luis de Guindos said there was a risk of an “accident”, although the companies’ stronger fundamentals meant the current situation was not directly comparable to the dotcom bubble of the 1990s.
“The valuations are very high by historical standards,” he said. “The possibility of an accident is going to be there.”
High levels of public debt could further undermine financial stability, according to the ECB, which warned that this could lead to fluctuations in the value of the euro and the cost of public debt in the euro zone.
Market concerns about “strained public finances could create tensions in global bond markets,” the ECB said.
“At the same time, the fiscal fundamentals of some euro area countries have been persistently weak. Fiscal slippage could test investor confidence.”
