Could Europe’s $12.6tn holdings of US assets be used as leverage if relations with Washington sour further? That’s the question posed by FT Alphaville last month, and it’s a good one.
After all, Europe is collectively now the largest foreign holder of US federal debt, and also owns a vast amount of US real estate, stocks and other assets. In a world where economic relationships are increasingly weaponised — and the US dependence on foreign capital is greater than ever — it is tempting to think that this must confer some strategic power.
FTAV is essentially right: Europe’s US government debt holdings don’t translate into usable leverage, because most of them can’t be politically co-ordinated and selling would be self-defeating.
The reason is simple. “Europe” may hold a lot of US assets, but that doesn’t mean Europe can control them or deploy them as a co-ordinated political tool. Much of Europe’s exposure actually sits in private portfolios — pension funds, insurers, banks, and asset managers — not in a single public balance sheet that can be mobilised strategically.
But there’s an important distinction that tends to get lost in this debate. There are two very different stories here, and Alphaville only told one of them.
— A deliberate and co-ordinated weaponisation, where Europe uses its holdings as a bargaining chip; and
— A slow, decentralised buyers’ strike, as investors gradually stop adding to US assets.
The first much harder and, in practice, far less credible. But the second one is plausible. That’s why the “Europe has leverage because it holds a lot of Treasuries” framing gets the problem backwards.
The real leverage is not in selling what Europe already owns — which would be costly, destabilising, and largely self-defeating — but in stopping the accumulation of US debt. This is an intertemporal choice, not a tactical one.
Why a Treasury ‘sell threat’ isn’t real leverage
If Europe tried to weaponise its existing Treasury stockpile through sudden sales, the costs would land immediately on Europe itself.
A disorderly sell-off would push yields higher, reduce the market value of the remaining holdings, tighten global financial conditions, and almost certainly trigger spillovers into European funding markets. The act of “using” the leverage would destroy the asset value that supposedly gives Europe power in the first place.
This is why, historically, reserve adjustment almost never happens through dramatic liquidation. It happens through flows: less accumulation at the margin, gradual rebalancing, and slow substitution into other safe assets.
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Could Europe’s $12.6tn holdings of US assets be used as leverage if relations with Washington sour further? That’s the question posed by FT Alphaville last month, and it’s a good one.
After all, Europe is collectively now the largest foreign holder of US federal debt, and also owns a vast amount of US real estate, stocks and other assets. In a world where economic relationships are increasingly weaponised — and the US dependence on foreign capital is greater than ever — it is tempting to think that this must confer some strategic power.
FTAV is essentially right: Europe’s US government debt holdings don’t translate into usable leverage, because most of them can’t be politically co-ordinated and selling would be self-defeating.
The reason is simple. “Europe” may hold a lot of US assets, but that doesn’t mean Europe can control them or deploy them as a co-ordinated political tool. Much of Europe’s exposure actually sits in private portfolios — pension funds, insurers, banks, and asset managers — not in a single public balance sheet that can be mobilised strategically.
But there’s an important distinction that tends to get lost in this debate. There are two very different stories here, and Alphaville only told one of them.
— A deliberate and co-ordinated weaponisation, where Europe uses its holdings as a bargaining chip; and
— A slow, decentralised buyers’ strike, as investors gradually stop adding to US assets.
The first much harder and, in practice, far less credible. But the second one is plausible. That’s why the “Europe has leverage because it holds a lot of Treasuries” framing gets the problem backwards.
The real leverage is not in selling what Europe already owns — which would be costly, destabilising, and largely self-defeating — but in stopping the accumulation of US debt. This is an intertemporal choice, not a tactical one.
Why a Treasury ‘sell threat’ isn’t real leverage
If Europe tried to weaponise its existing Treasury stockpile through sudden sales, the costs would land immediately on Europe itself.
A disorderly sell-off would push yields higher, reduce the market value of the remaining holdings, tighten global financial conditions, and almost certainly trigger spillovers into European funding markets. The act of “using” the leverage would destroy the asset value that supposedly gives Europe power in the first place.
This is why, historically, reserve adjustment almost never happens through dramatic liquidation. It happens through flows: less accumulation at the margin, gradual rebalancing, and slow substitution into other safe assets.