Europe Can’t Weaponise Capital Markets - And Trying To Would Backfire

As geopolitical news flow has intensified, amid President Trump’s threatened tariffs over Greenland, so has the increasingly hyperbolic nature of commentary surrounding the issue.

Many, frankly, would benefit from taking the advice of Treasury Secretary Bessent, to step back, take a deep breath, and let things play out.  

Retaliation Is Thus Far Just Rhetoric

Importantly, while punchy rhetoric has been thrown around by all sides, especially European leaders touting potential retaliatory measures in response to Trump’s negotiating gambit, there has yet to be any concrete action. In keeping with the recent past, the commonly held and likely correct view is that this is all an attempt by Trump to gain leverage in negotiations. Furthermore, and also in keeping with their typical ‘modus operandi’, the EU will respond only to measures that are implemented, not those that are simply rumoured, further opening space for talks on the issue of Greenland to take place.

Still, that hasn’t stopped some rather nonsensical chatter starting to do the rounds, chiefly centring on the potential for Europe to ‘weaponise’ capital markets in an apparent effort to retaliate against the tariff proposals. This falls down, rather quickly, on a number of different levels.

Weaponising Capital Markets Wouldn’t Be Simple

Firstly, while it is true that Europe holds a lot of US securities – to the tune of as much as $8tln of stocks and bonds combined – this does not tell the full story.

Taking Treasury holdings in particular, simply as data is more easily available, the most recent TIC report points to total European holdings of around $3.6tln, meaning that we’ve already more than halved the amount that could be ‘weaponised’. There are, though, further complications.

Of this $3.6tln, a substantial chunk will be held simply for collateral or cash management purchases, and not as a result of any particular discretionary investment decisions. The $480bln of holdings in Belgium are an example of this, given that the bulk of those assets will simply be sat in the care of Euroclear. Furthermore, even if those holdings are for discretionary purposes, they are largely held by private individuals, corporates, and funds, not by central government, thus making mandating sales a near-impossibility. Added to which, there is the not insignificant matter that, even if Treasuries are nominally held in Europe, those securities may well be owned by investors domiciled outside the region, further reducing the amount that  could be used in any capital-based retaliatory measures.

All that said, let’s assume that, for argument’s sake, it was possible to somehow ‘weaponise’ these holdings to seek some sort of revenge for the Trump Admin’s threats over Greenland.

And Would Also Be Counter-Productive

Put very simply, doing so would be akin to shooting oneself in the foot for two, very obvious, reasons.

Firstly, dumping Treasuries en masse would have the predictable impact of sending bond prices sharply lower, in very violent fashion. This, of course, would have an equal impact of sending Treasury yields sharply higher, though given the interlinked nature of global government bond markets, there would be a significant spill-over impact on Govvies elsewhere, including likely sending eurozone borrowing costs sharply higher too. Not only would this amount to a significant tightening in financial conditions, the violent nature of any sell-off would also pose significant risks to financial stability more broadly.

Secondly, assuming that those Treasury holdings were sold, there is then the question of where that cash would be put to work. If the whole aim of this exercise is to reduce exposure to the US, it’s doubtful that this cash would remain in USD for especially long, thus triggering repatriation flows back into the eurozone. Were this to happen, and a few trillion USD to be sold back into EUR, in short order, the obvious market reaction would be a significant strengthening in the EUR. In turn, such a strengthening, given the vast nature of such a move, would pose a major headwind to the bloc’s export market, again acting to choke off economic growth.

Conclusion

In short, then, this entire idea seems to stem from little more than hysteria, being not only unworkable in practice, but also incredibly short-sighted.

A more practical option, if capital markets were to be seriously considered in any European retaliation, would be a ‘buyer’s strike’ at upcoming Treasury auctions, though even that would be a relatively difficult step to actually enact.

Furthermore, with my base case continuing to assume that what we’re seeing is another example of the Trump Admin’s ‘escalate to de-escalate’ strategy playing out, and with an ‘off-ramp’ from the entire saga likely to be found sooner rather than later, much of this is likely to prove rather academic before too long in any case.