Financial institutions as new battlefront amidst transatlantic rift

As the Greenland crisis reached a peak in the days leading up to Davos, European policymakers began exploring tools that could potentially be repurposed as leverage against the Trump administration. Behind closed doors, and away from reporters, financial institutions entered the conversation by raising the prospect of the “weaponisation of capital” targeting both private and public holdings of US assets.

It remains unclear how much influence Europe’s signalling had on the White House’s decision to step back. Nevertheless, the episode raises a broader question that is being explored by an article for Foreign Policy: Could Europe realistically exploit weaponised interdependence to exert financial pressure on the United States?

According to the publication, one of Europe’s largest financial institutions, Deutsche Bank, warned clients in a January 18 note that “Europe owns Greenland, it also owns a lot of [US] treasuries,” suggesting the EU could escalate tensions through a “weaponisation of capital” by reducing private and public exposure to US debt instruments.

Later that week, US Treasury Secretary Scott Bessent said Deutsche Bank no longer stood behind the analyst’s report. Still, the bank’s global head of foreign exchange research, George Saravelos, was far from alone in raising the idea. Within days, several European pension funds either eliminated or sharply reduced their holdings of US Treasuries and—perhaps as a result—US rhetoric about European strength became noticeably less confrontational.

Financial flows and financial policy can function as tools of coercive power. There is some evidence that shifts in capital flows placed pressure on Washington last year; after Trump’s sweeping tariff announcement in April, reported moves away from Treasuries appear to have contributed to a partial policy adjustment.

Despite the dollar’s sharp decline and ongoing debate about the United States potentially losing its reserve currency status, available evidence points instead to more routine drivers—such as inflation concerns and policy uncertainty—prompting a gradual reallocation of investment away from the United States rather than any coordinated financial offensive.

While some analysts question whether Europe could escalate further given its extensive trade ties with the United States, smaller financial markets, and deep interdependence, the underlying capacity does exist.

As the author notes, the state weaponization of finance is not new but has deep historical roots. In the late 19th century, European governments—particularly France and Germany—actively used financial tools to advance strategic interests. The alignment of finance with diplomacy was seen as normal, and opposing it could be dismissed as “financial pacifism.” During tensions with Russia, German Chancellor Otto von Bismarck barred the Reichsbank from accepting Russian securities as collateral, while after the Franco-Prussian War an “official but tacit ban” discouraged French investment in Germany.

Translating such tactics into today’s environment, Foreign Policy argues that the primary arena for financial weaponization would be sovereign debt markets—US Treasuries on one side and a mix of national and EU-level debt instruments on the other.

As per the publication's analysis, the United States retains a structural advantage because Treasuries sit at the core of global finance: they are large, highly liquid, and deeply integrated into international capital flows. Virtually all national financial systems are linked in some way to the US Treasury market, which significantly lowers Washington’s borrowing costs.

This makes Treasuries a potentially powerful pressure point for Europe, but also a delicate one. Any attempt to disrupt the market risks backfiring on the EU, especially given that much of Europe’s Treasury exposure is held by private investors.

Even so, European governments still possess tools to act more assertively. According to the article, financial systems are highly sensitive to regulatory arbitrage, and industry literature is filled with examples of actors exploiting loopholes. If policymakers at the European Central Bank and other EU institutions were to design the right regulatory incentives, European funds could gradually shift their positions. While the technical and political barriers are substantial, the article suggests such a strategy is feasible.

On the defensive side, Europe could strengthen its financial standing by expanding common EU debt, building on the large-scale Next Generation EU issuance during the COVID-19 pandemic. Although EU-level bonds still trade at a discount relative to comparable national debt—reflecting investor caution—the long-term benefits could be considerable.

As such, the article predicts that a deeper common debt market could support coordinated defence spending, provide a credible alternative to the Treasury market, and ultimately create a stronger backbone for European finance, investment, and economic growth.

By Nazrin Sadigova