Key Points
- Deutsche Bank believes the impact of Trump’s tariffs on Greenland on the euro may be limited.
- The reason is that Europe is the U.S.’s largest lender, owning $8 trillion in U.S. assets.
- Trump’s threats could encourage Europe to diversify its investments away from the U.S. dollar.
- The key to watch is whether the EU uses its “anti-coercion instrument” to retaliate.
President Trump’s latest trade threats against Europe over Greenland are rattling markets, but one top analyst believes the impact on the euro might be surprisingly limited. The reason? The United States needs Europe’s money.
According to a new report from Deutsche Bank, European countries own a staggering $8 trillion in U.S. bonds and stocks. That’s almost twice as much as the rest of the world combined. This makes Europe the U.S.’s largest lender, and in the current environment of geopolitical tension, it’s not a given that Europeans will be willing to keep playing that role.
“In an environment where the geoeconomic stability of the Western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part,” wrote George Saravelos, Deutsche Bank’s global head of FX research.
He argues that Trump’s new tariffs, which are a direct response to European support for Greenland, could actually encourage European countries to diversify their investments away from the U.S. dollar. It could also push them to become more politically united.
The key thing to watch, according to Saravelos, is whether the European Union decides to use its “anti-coercion instrument.” This powerful trade tool, which has never been used before, would allow the EU to hit back at the U.S. with its own set of retaliatory measures.
Saravelos believes that the “weaponization of capital,” rather than trade alone, is the real threat to markets. Given the deep financial ties between the U.S. and Europe, any move by Europe to pull its money out of the U.S. would be far more disruptive than another round of tariffs.
