President Donald Trump has backed away from threatening tariffs on NATO allies in response to his plan to seize Greenland, but the damage has been done, diplomatically and financially.
The dollar has continued to fall and major investors in Northern Europe are reportedly reassess their exposure to US assetswhile Danish pension funds have already abandoned Treasury bonds.
This is partly due to concerns over US debt, but Trump’s Greenland crisis and continued unpredictability have also fueled calls for Europe to militarize its capital. Actually, European investors own $8 trillion in US stocks and bonds, including $3.6 trillion in Treasury debt alone.
Europe accounts for about a third of U.S. government bonds held abroad, or about 10% of the entire Treasury market, after nearly doubling its holdings since 2019, according to a note Wednesday from Capital Economics.
But it is precisely this massive stockpile that makes it unlikely that Europeans will suddenly sell Treasuries, because moving so much money would shake up financial markets.
Why the United States has “escalation dominance”
Turning to alternative investments would cause these prices to skyrocket and reduce their expected returns, the note said. Other safe havens, such as the Swiss franc and gold, have already appreciated so much that they offer negative real returns.
“Not only would this have a financial cost, but it would result in a response in kind: American investors also hold large amounts of European government bonds! » added Jonas Goltermann, deputy chief economist at Capital Economics. “Beyond This means that European banks remain dependent on dollar funding which is ultimately backed by the Federal Reserve. “Escalation dominance,” to use the military expression, is decidedly in favor of the United States.”
Michael Brown, senior research strategist at Pepperstone, also pointed out that a significant portion of U.S. holdings in Europe are for collateral or cash management purposes, not discretionary investment decisions.
Furthermore, even in these discretionary cases, private investors own the U.S. assets, meaning any government mandate to sell them would be nearly impossible, he said in a note Wednesday.
Treasury bill dumping would harm Europe
If Europe dumped its Treasuries, bond prices would fall “very violently”, with knock-on effects elsewhere, including the eurozone, where borrowing costs would skyrocket.
The foreign exchange market would also experience upheaval as the euro soars, posing a major obstacle to euro zone exports and economic growth, Brown added.
“A more practical option, if capital markets were to be seriously considered in the context of possible European retaliation, would be a ‘buyers’ strike’ at the next Treasury auctions, although even that would be a relatively difficult step to implement,” he explained.
