While the European Union assesses options to retaliate against President Donald Trump’s latest tariffs, its most powerful weapon might lie in financial markets.
France has already been urging the EU to utilize its “,” which can target foreign direct investment, finance, and trade. This follows Trump’s announcement of new measures that sent troops to Greenland as part of his plans to take over the semi-autonomous Danish territory.
On the surface, a 10% tariff escalating to 25% would have minimal economic impacts, Capital Economics chief economist Neil Shearing stated in a note on Sunday. He estimated that they would reduce GDP in the targeted NATO economies by 0.1 – 0.3 percentage points and increase U.S. inflation by 0.1 – 0.2 points.
“The political consequences would be far more significant than the economic ones,” he cautioned, as any attempt by the U.S. to seize Greenland by force or coercion could potentially cause irreparable damage to NATO.
So far, European officials have indicated that Greenland’s sovereignty is a non-negotiable red line, while the Trump administration has not budged on its stance either.
However, the U.S. has a crucial vulnerability that the EU can exploit, according to George Saravelos, head of FX research at.
“Europe owns Greenland, and it also holds a large amount of Treasuries,” he wrote in a note on Sunday.
Owning these bonds helps balance America’s substantial external deficits, and Europe is the world’s largest lender to the U.S.
For instance, offsetting the U.S. trade imbalance demands substantial capital inflows from abroad. Meanwhile, the Treasury Department also has to finance budget gaps by issuing more debt, often to foreign investors.
“European countries own $8 trillion of US bonds and equities, nearly twice as much as the rest of the world combined,” Saravelos pointed out. “In an environment where the geoeconomic stability of the western alliance is being fundamentally disrupted, it’s unclear why Europeans would be as eager to play this role.”
As Trump threatened to disrupt global trade and finance last year, Danish pension funds took the lead in reducing their dollar exposure and repatriating funds, he said.
Such actions represented the “sell America” trade, where investors sold dollar-denominated assets due to doubts about their continued status as safe havens or their ability to offer attractive returns.
“With USD exposure still very high across Europe, recent developments have the potential to further encourage dollar rebalancing,” Saravelos added.
At the same time, he predicted that the euro and Danish krone might experience minimal impact from the fallout of Trump’s tariffs on NATO and any subsequent retaliation.
This is because European political cohesion is likely to strengthen in the face of Trump’s threats, with even right-wing officials who were previously sympathetic to him now rejecting his heavy-handed approach.
Saravelos sees additional leverage for Europe ahead of U.S. midterm elections, as the Trump administration is focused on affordability issues. In this regard, the EU could influence inflation and Treasury yields, which impact borrowing costs.
“With the US net international investment position at record negative levels, the mutual interdependence of European and US financial markets has never been greater,” he said. “It is the weaponization of capital rather than trade flows that would be far more disruptive to markets.”