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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a senior fellow at the Council on Foreign Relations
In seeking to fend off the ambitions of US President Donald Trump to take over Greenland, Europe has more leverage than some might suppose.
The White House knows it operates with a fundamental advantage that it can press. Europe’s economy and security are deeply intertwined with, and dependent, on the US. But even if there is an overall imbalance of power, Europe is not without cards to play and they go beyond deploying a “bazooka” of retaliatory tariffs or diplomatic pressure pointing out the geopolitical and economic costs of a Greenland takeover.
One is the region’s vast holdings of US Treasury bonds. US Treasury secretary Scott Bessent has made it clear that the administration wants to lower longer-term Treasury yields to help US household and business borrowers. It understands that many Americans no longer believe they can afford to buy a home, in part because of high mortgage rates that are anchored to longer-term government yields.
The Treasury department has already taken a number of steps to try to help. It has leaned more on shorter-term Treasury instruments for new issuance, to reduce the pressure to issue longer-term bonds. It has also vocally pushed the Federal Reserve to cut policy interest rates more aggressively and encouraged bank deregulation and stablecoin adoption that could result in more Treasury demand.
But Bessent still faces large and growing budget deficits that require increased bond issuance. Indeed, just this month, Trump called for the 2027 defence budget to be increased to $1.5tn. The Committee for a Responsible Federal Budget estimated that such a change would add $5.8tn to the US debt over the coming decade when interest is included.
Such fiscal dynamics mean that the US cannot afford to upset its most important buyers of Treasuries. And that’s where Europe comes in.
Most investors who discuss Treasury demand and supply risks tend to focus on the possibility that China reduces its Treasury holdings even more than it has done in recent years in the event that relations with the US sour. But Europe owns multiples more in US government bonds than China. As of November, using Treasury department data, the UK, Belgium, Luxembourg, France, Ireland, Norway and Germany owned $2.84tn in US Treasuries, more than 30 per cent of the total foreign-held US Treasury market.
Already just the risk of unpredictable American policy affecting demand for US debt is pushing large asset managers to rethink portfolios. In an interview with the FT this month, Dan Ivascyn, chief investment officer of the California-headquartered fund manager Pimco, said: “We’re in a multiyear period of some diversification away from US assets.”
Even if tensions escalate over Greenland and there is default buying of Treasuries as a haven asset in the short term, it would be hard not to imagine European asset owners at least considering more diversification.
While most pension funds have a fiduciary duty to put returns over other considerations such as politics, they also prioritise managing risk and could adjust portfolios even if the decision might weigh on returns. Already last year, Denmark’s largest pension fund, PFA, cut its US Treasury holdings, apparently as part of a risk-management adjustment.
PFA chief strategist Tine Choi Danielsen reportedly noted back in April that “Trump’s policies are causing so much turmoil and so many potential risks, such as questioning the dollar’s status as a reserve currency, the sustainability of government debt, and the independence of the central bank, that we have sold out”. She added: “We have retained our corporate bonds and equities. We believe in American companies, but we do not believe in the political United States.”
If Europe wants to deter Washington from a Greenland takeover, it could signal it wants government-affiliated investors such as public pension funds to review and potentially scale back US Treasuries exposure. That could create expectations of weakness in the market, spurring other asset owners to also cut holdings, pushing up long-term yields and creating contagion across other US financial markets. If sustained, US equity losses could hit retail sales and, of course, mortgage rates would probably rise. That’s the last thing Republicans would want months ahead of a key election.
It still seems highly unlikely that the US will secure the political and legal support — not to mention Europe’s blessing — to take over Greenland. But if Trump continues to press, Europe may decide its best line of defence is not trade, but capital.
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