Could the AI boom make borrowing more expensive in Europe?

Artificial intelligence (AI) giant tech companies are poised to raise the cost of borrowing for European governments and companies, according to recent findings. With over $1 trillion (€900 billion) flooding into AI development, these US tech behemoths - Amazon, Alphabet (Google), Meta, and Oracle - are competing with European governments and businesses for available investment capital.

So far this year, the four AI hyperscalers have issued $250 billion in bonds in dollars and €37 billion ($41 billion) in euros. Microsoft recently joined the bond issuance frenzy with a $25 billion sale, all in dollars.

Goldman Sachs projects that AI hyperscaler bond sales could reach $420 billion next year, including €60 billion in euros. This influx of capital could have detrimental effects on European economies, as sovereign bond yields have surged in recent months, straining public finances. France, with a sovereign debt-to-GDP ratio of 119% and a deficit above 5%, is already experiencing a higher interest bill, which is set to climb significantly in the coming years.

France's finance ministry will need to make substantial cuts, tax increases, or take on additional borrowing to manage this burden.

The European Central Bank has acknowledged that AI giants' presence in the euro bond market could make it harder for other companies and sectors to access finance. The increased competition for capital could force European governments, international lenders, and municipalities to find additional ways to finance their debts, such as through further budget cuts, tax hikes, or increased borrowing.

This could negatively impact European cities and regions, which rely on borrowing for essential public services like schools, transportation, and infrastructure. While AI investments may not be the sole cause of Europe's fiscal challenges, the US tech giants' massive capital appetite could exacerbate the situation in the coming years.