The European Union possesses a formidable economic tool beyond traditional tariffs: its substantial holdings of US debt. European nations collectively hold $8 trillion in US bonds and stocks, an amount nearly double the total holdings of the rest of the world combined. This financial leverage positions the EU as the largest creditor to the world's leading economy.

The United States' reliance on external capital inflows to offset its trade deficit, coupled with the Treasury Department's need to finance budget deficits by issuing debt to foreign investors, creates a key vulnerability. George Saravelos, Head of FX Research at Deutsche Bank, highlighted this, stating, "'Europe owns Greenland, and it also holds a significant amount of US Treasury bonds.'"

Saravelos questioned the EU's willingness to maintain this creditor role, remarking, "'Given the severe threat to the geoeconomic stability of the Western alliance, it is unclear why Europeans remain willing to continue in this creditor role.'" He suggests that the "weaponization" of these capital flows, rather than trade flows, holds the greatest potential for market disruption. Such movements could impact US Treasury yields and inflation, especially given the record interdependence between European and US financial markets.

This discussion of economic retaliation emerged last weekend after US President Donald Trump announced plans to impose 10% tariffs, potentially rising to 25%, on imports from eight European nations: Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland, over the issue of Greenland. In response, some European politicians raised the possibility of economic countermeasures.

Initial reactions from some Members of the European Parliament included announcing the potential to "freeze" the ratification of a trade agreement with the US. Taking a firmer stance, French President Emmanuel Macron stated he would propose activating the "Anti-Coercion Instrument."

Dubbed a "trade bazooka," this measure has never been activated by the EU and is designed to penalize partners attempting to threaten the bloc. Specifically, it would allow the EU to restrict imports of goods and services into the 450-million-strong market of its 27 members. Concurrently, it would limit investment, access to public procurement programs, and intellectual property protection.

Euro and USD banknotes. Photo: Reuters

Indeed, last summer, when Trump threatened tariffs on European imports, Danish pension funds led the way in reducing their exposure to the USD and repatriating capital, a trend dubbed "sell America." Saravelos believes recent developments could further accelerate this rebalancing away from the USD, noting, "'With Europe's USD exposure still very high, recent developments could further accelerate the rebalancing away from this currency.'"

He also suggested the EU has additional leverage ahead of the US midterm elections, as the Trump administration focuses on cost of living issues. At that point, EU capital flow movements could impact US Treasury yields and inflation.

To date, European officials have signaled that Greenland's sovereignty is a red line that cannot be compromised, while the Trump administration has not softened its stance. However, the extent to which the EU chooses to respond on the economic front will require considerable caution.

Analysts suggest that the tariffs US President Donald Trump threatened against the eight European nations are more politically symbolic than economically impactful. Neil Shearing, Chief Economist at Capital Economics, assessed that the 10-25% tariffs would have a minimal impact on the economies on both sides of the Atlantic. He estimated it would reduce the GDP of affected NATO economies by 0,1-0,3 percentage points and increase US inflation by 0,1-0,2 percentage points. According to ING, a 25% tariff increase would decrease European GDP by approximately 0,2 percentage points.

"'The political impact will be much greater than the economic impact,' Neil Shearing warned." Meanwhile, if the situation escalates into a full-blown trade war, both the EU and the US would "lose," according to ING. Furthermore, the bank advised, "'the experience of the past 12 months suggests not overreacting, as not every tough or dramatic statement is implemented.'"

Phien An (according to Fortune, Lemonde, ING)