The Earth’s carbon and hydrologic cycles are intimately coupled by gas exchange through plant stomata1, 2, 3. However, uncertainties in the magnitude4, 5, 6 and consequences7, 8 of the physiological responses9, 10 of plants to elevated CO2 in natural environments hinders modelling of terrestrial water cycling and carbon storage11. Here we use annually resolved long-term δ13C tree-ring measurements across a European forest network to reconstruct the physiologically driven response of intercellular CO2 (Ci) caused by atmospheric CO2 (Ca) trends. When removing meteorological signals from the δ13C measurements, we find that trees across Europe regulated gas exchange so that for one ppmv atmospheric CO2 increase, Ci increased by ~0.76 ppmv, most consistent with moderate control towards a constant Ci/Ca ratio. This response corresponds to twentieth-century intrinsic water-use efficiency (iWUE) increases of 14 ± 10 and 22 ± 6% at broadleaf and coniferous sites, respectively. An ensemble of process-based global vegetation models shows similar CO2 effects on iWUE trends. Yet, when operating these models with climate drivers reintroduced, despite decreased stomatal opening, 5% increases in European forest transpiration are calculated over the twentieth century. This counterintuitive result arises from lengthened growing seasons, enhanced evaporative demand in a warming climate, and increased leaf area, which together oppose effects of CO2-induced stomatal closure. Our study questions changes to the hydrological cycle, such as reductions in transpiration and air humidity, hypothesized to result from plant responses to anthropogenic emissions.