AI frenzy hides pullback risk? ECB Governing Council member: Once expectations fall short, the market will be very fragile.

ECB Governing Council member Fabio Panetta warned that overly optimistic valuations of technology companies could expose the market to the risk of a sharp correction. "Current asset prices reflect optimistic expectations for AI's future profitability," the Bank of Italy governor said in a speech on Monday. "These valuations help tech companies raise capital and sustain further investment, but they also leave the market vulnerable to sharp corrections when expectations fail to materialize, as the recent volatility in tech stocks has shown." As billions of dollars pour into AI technology, concerns about AI-related risks are mounting, fueling debate over whether valuations have become excessive and what a major market correction could mean for the global economy. Panetta also discussed the benefits and risks of AI's rapid development. ECB officials have repeatedly stressed that Europe cannot afford to fall behind in the AI wave, with Bundesbank President Joachim Nagel saying earlier this month that AI will be a "litmus test" for Europe. "For monetary policy, the implication is clear: assessing only the productivity gains from AI is far from enough," Panetta said. "We also need to understand who benefits from these gains, because how they are distributed will help shape aggregate demand and ultimately affect inflation." He said that according to his institution's estimates, widespread adoption of AI in Italy could boost annual labor productivity growth by more than 1 percentage point. However, given the interplay of multiple variables, it is difficult to estimate AI's full impact. "The timing, magnitude and transmission of these effects are highly uncertain," Panetta said. He analyzed that if AI mainly creates new tasks and raises expected labor income, households will feel a sense of wealth appreciation and become more confident about the future. This would drive consumption, further fuel the investment boom and potentially lead to more persistent inflation. "Conversely, if automation dominates, rising uncertainty about employment and wages could prompt households to save more and consume less," he said. "Weaker consumption could partially offset the investment boom, causing AI's disinflationary effects to emerge earlier."