The latest episode of the ECB Podcast explores how global economic volatility continues to shape the euro area financial system, despite a recent decline in overall uncertainty. Host Paul Gordon speaks with John Fell, Deputy Director-General for Macroprudential Policy and Financial Stability at the European Central Bank, who helps oversee the ECB’s Financial Stability Review.
Fell says uncertainty has fallen since the ECB’s previous review in May, thanks in part to an easing of trade tensions following a US EU tariff agreement. According to Fell, the agreement has reduced trade policy uncertainty and lessened the feared economic impact of escalating tariff disputes. However, he emphasised that the improvements are modest and that key risks remain.
Ongoing risks from trade policy, US institutional decisions and public debt
The full effects of tariff changes have yet to be felt, Fell warns. He notes that the US Supreme Court is still examining the legality of reciprocal tariffs, with a ruling expected by June next year. The ECB also remains concerned about the trajectory of US public debt, which is increasingly viewed as a structural global risk.
Although sentiment indicators show a slight improvement, Fell says the financial system continues to operate in an environment of elevated vulnerability. He describes the ECB’s financial stability assessments as naturally cautious, adding that the institution is even experimenting with large language models to evaluate sentiment within past publications.
Is the world in an AI investment bubble?
A significant part of the discussion focuses on whether the rapid acceleration of AI-related investment represents a bubble. Fell says the ECB hears frequent concerns from market analysts about overstretched valuations in AI-linked equities, but stresses the challenge of identifying bubbles in real time.
He cites examples such as historical railroad and electrification booms, which began as legitimate technological transformations before becoming speculative manias. The ECB is now monitoring three pressure points: stretched valuations, concentration among major AI firms, and rising leverage associated with capital-intensive hyperscaler expansion.
Fell notes that many large tech firms have financed AI infrastructure spending from internal cash flow, but those cash-flow limits are being reached. Companies may increasingly rely on debt to continue scaling large data-center and compute operations, creating potential vulnerabilities if the narrative-driven investment cycle slows.
What it all means for the euro area
The conversation underscores that while the euro area financial system remains resilient, it is far from insulated from global shocks. Trade disputes, judicial decisions in the US and the behaviour of technology mega-firms all feed into European stability assessments.
For policymakers, these risks complicate the environment in which banks, regulators and the ECB must operate. As Europe prepares for further macroeconomic headwinds, prudence remains a guiding principle in the ECB’s financial stability work.