The European capitals weigh their responses to the latest threat of tariffs by President Donald Trump, which is this time linked to his controversial bid to buy Greenland.
Analysts warn that the true battle could not be won in ports, but on the financial market. The White House announced duties of around 10% for eight NATO members beginning 1 February.
Deutsche Bank estimates that the EU holds assets worth $8 trillion, which makes it Washington’s biggest foreign creditor.
This immense exposure provides the bloc with a powerful lever should tensions escalate and a full-blown commercial confrontation occur, increasing the risk of capital flight or a rebalancing in the dollar.
EU financial power in Greenland dispute
George Saravelos, senior strategist at Deutsche Bank, highlighted in his recent report that trade discussions often overlook the EU as America’s largest lender.
The continent can inflict serious pain by unwinding its positions. Its holdings of US bonds and stocks are nearly twice as large as the total of all other countries combined.
He told his clients that despite its economic and military strength, “the US is weak in one important way: It relies heavily on other countries to cover its external debts.”
Washington is vulnerable because of this reliance on European capital. Greenland’s tariff war may accelerate the withdrawals of pension funds, echoing actions taken by Danish pension funds in 2012.
The capital market is the weaponized, and not trade flows
This confrontation is made even more dangerous by the fact that Europe may “shift” its battlefront from tariffs onto finance.
Experts say the EU has the ability to weaponize the capital markets, either by restricting US firms’ access to EU liquid assets or by shifting away from dollars-denominated investments.
These moves could undermine investor confidence and disrupt treasury returns, which are essential to America’s financing needs.
Saravelos said that the weaponization of trade flow rather than capital would be by far most disruptive for markets.
The fallout from this decision could be felt far beyond Greenland and Wall Street, causing global financial turmoil.
The capital markets prepare for the transatlantic turmoil
Tariffs on autos or steel are not the main concern, but rather ripple effects in global finance.
The interdependence of the European and American markets has never been higher.
A significant shift in dollar exposure can cause volatility to occur across currencies, stocks, bonds and other assets.
Saravelos warned that investors need to prepare themselves for increased uncertainty, even though the euro might not be as bad as they feared.
The consequences of the EU’s financial power could be felt far beyond Greenland.
Wall Street faces a clear risk: capital and not trade would become the frontline of this geopolitical conflict, if there is one.
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