Greenland Crisis: ‘Sell America’ is a long game for the Europeans
But after the Americans began their rapid ascent to Greenland at Davos (no occupation or tariffs on disobedient Europeans), I wouldn’t be so reckless. Maybe Europe has some leverage.Also Read | Europe has the weapons needed for Trump’s Greenland tariff war
Trump’s attempt to force allies to submit to his territorial demands will not be forgotten. As European Central Bank President Christine Lagarde told CNN, it should be a “wake-up call” for the bloc to decide what it needs to do to “be strong in our own right.” Before leaving early, he had to endure tariff-loving US Commerce Secretary Howard Lutnick at his Davos dinner.
Lagarde is right. Europe has no choice but to ensure that more of the continents’ huge savings are invested at home. This is easier said than done, of course. It is difficult for even the most patriotic portfolio manager to ignore the dynamism of the US economy, technology giants and depth of capital markets. But that’s no excuse for inaction: trust in Trump’s United States has been seriously damaged this week.
One way to build the eurozone’s fiscal strength is to embrace more common borrowing, thereby creating a safe asset that could rival U.S. Treasuries. The taboo on this subject has already been broken during the Covid epidemic.
At the height of the Greenland crisis, Bessent downplayed any “sell America” rhetoric emerging, comparing it to the panic in markets following Trump’s “Liberation Day” tariffs last year. On this occasion, he called on Europe not to retaliate.Also Read | EU Parliament freezes US trade deal over Trump’s Greenland pressures and tariff threats
But the comparison was telling, and the US’s recklessness and open mockery of its European allies concealed a real vulnerability: the US is the world’s largest debtor nation and relies on the “kindness of foreigners”, including Europeans, to finance its budget and current account deficits. Last year’s sharp sell-off in the bond market and the accompanying rise in US borrowing costs persuaded Trump to delay his extreme tariff proposals, giving birth to the so-called TACO trade – Trump Is Always Afraid. It looks like the bets on TACO have been proven right once again; Trump withdrew his Greenland-inspired tariff threats after several days of market volatility. The reason for the U-turn remains unclear, and no one knows when this president will change his mind again.
Danish pension fund AkademikerPension, which has pledged to exit $100 million in U.S. Treasury bonds, will not have triggered Trump’s downfall; That’s a drop in the $30 Trillion Treasury bond market ocean. But signaling is important, and the president was probably reluctant to learn whether others would follow suit.
Trump remains angry at Europe for not buying enough U.S. goods, but he also ignores the flip side of the U.S. trade deficit: Europe has become a major exporter of capital to the United States. Roughly 300 billion euros ($351 billion) of Europe’s savings flow out of the bloc each year, primarily to America. This helps pay for factories, inflates the value of the Magnificent Seven, and finances the US budget deficit. It allows the nation to consume more than it produces while suppressing the borrowing costs that are the essence of the United States’ Exorbitant Privilege.Also Read |Trump’s threats to Europe could make it harder for future US leaders to repair relations
Despite periodic fluctuations, European investors made profits from exporting capital. U.S. stocks have delivered superior returns since the global banking crisis, and the nation’s debt is also coming with higher returns. European financial institutions also rely on the Treasury as a safe asset, source of liquidity and collateral for their lending activities.
“It is impossible to move away from America,” UBS Group AG boss Sergio Ermotti told Bloomberg Television this week, noting the United States’ superior growth and innovation.
But it is counterproductive for the bloc to continue exporting the bulk of its savings to the United States as Trump undermines NATO and openly disparages its European allies. The money might be better used to increase prosperity and innovation at home and to finance the rearmament of Europe.
Fortunately, European pension funds don’t need politicians to tell them that too much exposure to the US right now might be a bad idea. Trump undermines the independence of the Federal Reserve and pays little attention to fiscal responsibility. Confidence in US institutions and the notion that Treasuries and the US dollar are safe havens are weakening
Dan Ivascyn, chief investment officer of bond giant Pimco, told the Financial Times last week that Trump’s unpredictable policies are pushing him to move away from US assets, a process that will take several years.
But if international investors are to do the same, they’ll need something else to buy. Germany’s massive military and infrastructure spending will increase bond supply in coming years, while also helping Europe close its trade surplus and stem capital outflows. But there is no safe asset pool on the continent large enough to rival U.S. Treasuries. This weakens the euro’s role as an alternative reserve currency to the dollar.
Boosting investment through joint borrowing was a key recommendation of former ECB president Mario Draghi’s 2024 report on Europe’s competitiveness. Some steps have been taken in this direction, including the issuance of a joint debt of 90 billion euros to support Ukraine. However, the continent has long been divided over common bonds, with frugal countries like Germany concerned about fiscal profligacy by others.
But today, bigger fears come into play. Just as the continent needs to rearm, it also needs to better integrate its fragmented capital markets.
Trump’s Greenland provocation will not be the last. A safe asset that could compete with Treasuries could help give Europe the financial strength and autonomy to compete with the Americans. This will help deter bullies.
