Can Europe’s most powerful “weapon” stand up to the United States?

(Brussels/Washington, Jan 20) As U.S. President Donald Trump steps up pressure over Greenland and Europe scrambles to formulate responses, financial markets have begun debating an extreme form of potential retaliation: using capital as a geopolitical weapon.

European countries hold trillions of dollars in U.S. Treasury bonds and equities, some of which are owned by public-sector funds. This has fueled speculation that Europe could respond to a renewed tariff war by selling U.S. assets, a move that could raise U.S. borrowing costs and weigh on stock prices.

In practice, however, such action would be difficult to implement. Most U.S. assets are held by private investors beyond direct government control, and any forced sell-off could also hurt European investors themselves. As a result, most strategists believe the likelihood of policymakers taking this step remains low. Since Trump returned to the White House a year ago, Europe has largely avoided direct confrontation.

Capital “weaponization” as a tail risk

Still, the concept of “weaponizing capital” has entered mainstream market discussion, reflecting how Trump’s expansionist policies are reshaping geopolitical calculations. Europe holds more than $10 trillion in U.S. assets, with non-EU countries such as the UK and Norway holding even larger amounts.

Analysts note that the United States’ large net international investment deficit poses a potential risk to the dollar—but only if foreign holders are willing to absorb financial losses. European public-sector investors could, in theory, stop adding to U.S. assets or begin reducing exposure, but a significant escalation would likely be required before political objectives override investment returns.

Rising tensions were already reflected in Monday’s market moves, with U.S. equity futures, European stocks, and the dollar under pressure, while gold and safe-haven currencies strengthened. The reaction echoed last year’s response to Trump-era tariffs, though on a milder scale, suggesting a possible revival of “sell America” trades.

From trade friction to financial conflict

So far, Europe’s most tangible response remains trade-focused, including the possibility of suspending approval of a trade agreement reached last July and considering tariffs on roughly €93 billion worth of U.S. goods. Some European officials have urged preparations for stronger countermeasures.

Turning U.S. asset holdings into a political weapon would mark a major escalation, effectively transforming an intensifying trade dispute into a financial conflict affecting global capital markets.

Observers argue that while U.S. military and economic power remains formidable, its reliance on foreign capital to finance large external deficits represents a structural vulnerability. As transatlantic geoeconomic stability comes under strain, Europe’s willingness to continue supporting that model is increasingly in question.

Private investors hold the key

Only a fraction of U.S. assets are held by European public institutions, with the majority owned by private investors. Moreover, a significant portion of U.S. securities held in Europe ultimately belongs to investors based elsewhere.

Many investors concerned about excessive exposure to U.S. assets may have already reduced positions during last year’s “sell America” episode. Despite pressure on the dollar, U.S. government bonds delivered their best annual performance since 2020, while U.S. equities continued to set new records.

Some analysts believe that portfolio rebalancing has already taken place, reducing the risk of severe disruption from renewed market volatility.

Overall, the European Union has limited ability to force private investors to sell dollar assets and can, at best, encourage a gradual shift toward euro-denominated investments.