If economic or security relations with the United States were to reach a high level of tension, eurozone countries would in theory have a powerful weapon: they hold just over $9 trillion in American financial assets.
If they were to sell these financial securities, especially the public debt of the country, the American economy would immediately suffer the repercussions: difficulties in financing the budget deficit, strong tensions on interest rates, less credit and therefore a stagnant growth. The ultimate weapon? Not really, and for several reasons.
Firstly, an American bond crisis would have repercussions in Europe, as interest rates would also rise there, increasing the cost of credit and public debt. Secondly, as soon as Europeans started selling American public debt, the value of the securities they have not yet sold would decrease: when a creditor holds a debt yielding 3%, if new loans are made at 4%, the old debts lose their interest.
Another scenario is possible
Finally, European creditors of American public debt are spread across different countries and are mainly private actors (pension funds, investment funds, etc.). There is not a European “button” to press to initiate such a policy, as it would require an impossible transnational public-private coordination effort.
Does this mean that Europeans are lacking in financial weapons? This is not what economists Paola Subacchi and Paul van den Noord think. They propose another scenario, in which creditors in the Old Continent gradually reduce their purchases of US public debt.
“Why? Because the guarantee of being repaid decreases: Stephen Miran, one of Trump’s economic advisers at the central bank, for example, explains that foreign creditors could be forced to exchange their current securities for 100-year bonds at low or zero interest rates! Because in a fragmenting global economy, the role of the dollar is expected to decline. And because Trump’s strong will to lower the dollar reduces the returns in euros for Europeans.
Do we already see this kind of behavior? When Valérie Baudson, the CEO of Amundi, Europe’s largest investment fund with EUR 2.4 trillion in assets under management, stated in early February that, for this year, she now advises her clients to no longer invest in the dollar and wants to reduce her investments in the American currency, people pay attention!
But it will take several months before determining if there is indeed a decreasing European demand. Thus, Paul van den Noord explains that, “At this stage, there is no real indication that Europe is reducing its marginal demand for US Treasury bonds; the available elements remain very anecdotal.”
Because there is still one last question: where to invest the money?
“There is still no major European bond market that can serve as an alternative to the United States. They represent 40% of the global bond market compared to just over 15% for the eurozone and the same for China. No other asset is currently available in sufficient quantity to replace American securities,” concludes Florence Pisani, chief economist at Candriam.
Provisional conclusion: today, it remains difficult to unplug the American savings vacuum.
