Climatic change may bring about increased aridity to large areas of Europe. Higher temperatures, larger water deficits and high light stress are likely to occur in conjunction with elevated atmospheric CO2. This raises the question whether a high CO2 concentration in the atmosphere can compensate for the decrease in carbon gain in water-stressed plants. The processes which determine dry matter production and the ways they are affected by soil water deficits are discussed. It is now well established that in most species and under most circumstances stomata are the main limiting factor to carbon uptake under water deficit, the photosynthetic machinery being highly resistant to dehydration. However, when other stresses are superimposed, a decline in photosynthetic capacity may be observed. In the short term, under drought conditions, the increase in CO2 in the atmosphere may diminish the importance of stomatal limitation for carbon assimilation, inhibit photorespiration, stimulate carbon partitioning to soluble sugars and increase water-use efficiency. Some recent evidence seems to indicate that under conditions of high irradiance, plants growing at elevated CO2 may develop protection towards photoinhibition, which might otherwise result in significant losses in plant production under stress conditions. In the longer term though, a negative acclimation of photosynthesis appears to occur in many species, an explanation for which still needs to be clearly identified. Similarly, the effects of extended exposure to elevated CO2 under arid conditions are not known. Plant production is more closely related to the integral of photosynthesis over time and total foliage area than to the instantaneous rates of the photosynthetic process. Water deficits result in a decrease in foliage area biomass and, therefore, in productivity. On the other hand, the increase in air temperature may result in more respiratory losses. However, experimental as well as simulatory evidence suggests that doubling CO2 concentration in the air may improve carbon assimilation and compensate partially for the negative effects of water stress even if we assume a down-regulation of the photosynthetic process as a result of acclimation to elevated CO2.