Rising water-use efficiency in European grasslands is driven by increased primary production

European grasslands increase their water-use efficiency in summer through increased gross primary production and regulated transpiration, according to an analysis of three indices derived from remote sensing over the period 1995-2018 Water-use efficiency is the amount of carbon assimilated per water used by an ecosystem and a key indicator of ecosystem functioning, but its variability in response to climate change and droughts is not thoroughly understood. Here, we investigated trends, drought response and drivers of three water-use efficiency indices from 1995-2018 in Europe with remote sensing data that considered long-term environmental effects. We show that inherent water-use efficiency decreased by -4.2% in Central Europe, exhibiting threatened ecosystem functioning. In European grasslands it increased by +24.2%, by regulated transpiration and increased carbon assimilation. Further, we highlight modulation of water-use efficiency drought response by hydro-climate and the importance of adaptive canopy conductance on ecosystem function. Our results imply that decoupling carbon assimilation from canopy conductance and efficient water management strategies could make the difference between threatened and well-coping ecosystems with ongoing climate change, and provide important insights for land surface model development.