Europe holds an immense $12.6 trillion in US assets, a sum exceeding the rest of the world's holdings combined, yet this significant financial leverage offers little practical advantage in trade disputes.
The discussion surrounding this leverage re-emerged following Donald Trump's comments regarding Greenland's sovereignty, accompanied by predictable tariff threats, which prompted assertive responses from European leaders like Emmanuel Macron and Kaja Kallas.
Strategists Analyze the Impracticality of a European Asset Fire Sale
Some market participants have speculated about the potential for Europe to divest its holdings in US Treasuries and stocks. The underlying rationale suggests that America's substantial deficits and reliance on foreign capital could be threatened if Europe, its primary lender, were to withdraw its investments, potentially leading to increased US borrowing costs and a stock market downturn.
However, even proponents of this theory acknowledge its complexities. A significant portion of the $12.6 trillion is held within private portfolios and investment funds, rather than government entities. As George Saravelos of Deutsche Bank notes, while Europe possesses considerable US assets, initiating a mass sell-off would likely incur greater damage to Europe itself.
Saravelos estimates that approximately $8 trillion of these assets are held directly by European investors, with the remainder managed through custodians and vehicles based in the region but potentially owned by non-European entities. Crucially, governments cannot unilaterally compel private holders to sell their assets, and any such attempt would carry severe economic repercussions.
Market reactions have already indicated investor apprehension. Following Trump's recent tariff announcements, US equity futures experienced a decline, with European stocks also showing weakness. The US dollar weakened, while traditional safe-haven assets such as gold, the euro, and the Swiss franc saw gains. This mirrors market behavior observed in April of the previous year when Trump's "Liberation Day" tariffs coincided with a "Sell America" trade sentiment.
EU Considers Tariffs and Trade Deal Suspension as Immediate Responses
As an immediate course of action, Europe has considered delaying the July trade deal with Washington. There are also discussions about implementing retaliatory tariffs on US goods valued at approximately €93 billion (around $108 billion). German officials are advocating for the most robust possible measures, yet they too recognize the significant risks associated with liquidating assets.
The weaponization of these holdings would escalate the conflict beyond a typical trade dispute into the realm of financial markets, potentially triggering a capital war. Saravelos emphasizes the broader implications: "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."
While Norway's sovereign wealth fund stands as a major public holder with approximately $2.1 trillion, this figure is considerably smaller than the total private capital invested in US assets across Europe. Intriguingly, some of these European-held US assets are ultimately not owned by European entities.
The Challenge of Absorbing Europe's US Asset Holdings
Furthermore, the practical challenge of Europe attempting to sell its vast US holdings is compounded by the lack of sufficient buyers. Every seller requires a buyer, and the scale of Europe's divestment presents a significant hurdle.
Current market data from Bloomberg indicates that the total market capitalization of the MSCI All-Country Asian Index is approximately $13.5 trillion, and the Asian segment of the FTSE World Government Bond Index is valued at $7.3 trillion. These figures suggest that Europe's US asset holdings nearly encompass Asia's entire investable market universe.
The notion of Europe rapidly exchanging its Nvidia shares for Japanese bonds, for instance, is considered unrealistic. While the US investment industry is substantial and could potentially absorb some of these assets at a favorable price, the US itself maintains a negative net international investment position of $27 trillion. A significant price adjustment to absorb European assets could lead to a substantial devaluation of the US dollar.
Analysts at Rabobank highlight the immense depth, breadth, and liquidity of US capital markets. They state, "While the US’s large current account deficit suggests that in theory there is the potential for the USD to drop should international savers stage a mass retreat from US assets, the sheer size of US capital markets suggests that such an exit may not be feasible given the limitations of alternative markets."
The geopolitical context, reminiscent of Cold War dynamics, underscores the concept of mutually assured destruction. China has previously faced suggestions to divest its Treasury holdings during periods of tension, but has consistently refrained from doing so. This reluctance stems from the potential for such an action to destabilize its own economic system. As Paul Getty famously put it, "If you owe the bank $100, you’ve got a problem. If you owe the bank $100 million, the bank has the problem."
China's managed currency policy, which aims to maintain a weaker yuan against the dollar, necessitates the accumulation of dollar reserves. Over time, a portion of these reserves has reportedly been moved into private hands to obscure the total amount. Analyst Brad Setser estimated China's "shadow reserves" to be around $3 trillion in 2023.
Consequently, any significant divestment of US assets by China would likely result in the destabilization of its own domestic markets first.