Lagarde Warns of AI-Driven Market Risks Amid Rapid Growth

European Central Bank President Christine Lagarde has sounded the alarm on potential risks to financial markets from the rapid growth of artificial intelligence (AI). During a hearing before the European Parliament's Committee on Economic and Monetary Affairs, Lagarde warned that investment activity in AI will be influenced by developments in the financial markets. She noted that global equity valuations are concentrated in a small number of AI-related companies rapidly increasing their debt levels.

Lagarde stated that a sharp reassessment of AI company prospects and debt sustainability could trigger market corrections, affecting investors in the euro area and beyond. However, she believes the EU must take action to harness AI's potential for boosting productivity and living standards while safeguarding its sovereignty in this area.

The ECB President highlighted AI's strengths, including its ability to transform production, work, and innovation. She noted that by 2026, businesses will allocate around 10% of total investment to AI, with funding linked to the technology accounting for a quarter of corporate lending growth. Lagarde estimated that widespread AI adoption could increase GDP by 0.3-0.4% per annum over a decade.

Lagarde emphasized that Europe has an opportunity to harness AI but success is not guaranteed. She noted that businesses can use AI to produce more and reduce costs, easing inflationary pressures in the long term. However, this will depend on its uptake in the economy. An ECB survey found that by 2025, 38% of euro area firms had reported at least moderate AI use, while only 7% reported significant adoption.