As European officials debate how to respond to President Donald Trump’s new tariff threats and Greenland acquisition proposals, Deutsche Bank has noted that European investors hold roughly $8 trillion in U.S. bonds and equities, which could be an ace up Brussels’ sleeve in future negotiations.
While the number alone is nothing to scoff at, things are much more interesting when one considers it represents nearly double what the rest of the world holds combined. In other words, European holdings play a crucial role in financing America’s large trade and budget deficits, meaning that if confidence in the U.S. wavers, this kind of support could also go down.
“Europe owns Greenland, it also owns a lot of Treasuries…. In an environment where the geoeconomic stability of the Western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part,” wrote George Saravelos, head of FX research at Deutsche Bank.
With U.S. midterm elections fast approaching, and the White House paying more attention to the living standards in the country, this potential trump card could gain more weight in the near future. By shifting investment flows, the European Union could affect U.S. inflation and Treasury yields, turning its holdings into a ‘sell America’ weapon to counter the incoming ‘buy Greenland’ warnings from across the pond.
Greenland tensions escalate
Commenting on the situation, Saravelos also noted that the European and U.S. financial markets have never been more dependent on each other. Accordingly, weaponized capital would have the most disruptive effect on the markets, more so than any trade wars.
Some signs of what could happen have already emerged. For instance, when Trump threatened to upend trade relations, Danish pension funds aimed to cut dollar exposure and repatriate capital.
“With USD exposure still very elevated across Europe, developments over the last few days have the potential to further encourage dollar rebalancing,” Saravelos added.
Nonetheless, Saravelos expects the euro and Danish krone not to feel any immediate impact. Rather, he sees Trump’s pressure tactics leading to a tighter political unity in Europe, even among right-wing parties that the American president sees as more approving of him.
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