Europe can wield this $8 trillion ‘sell America’ weapon as Trump reignites a trade war over his Greenland conquest ambitions

As the European Union weighs options to retaliate against President Donald Trump’s latest tariffs, its most potent weapon may be in financial markets.

France is already urging the EU to deploy its “anti-coercion instrument,” which can target foreign direct investment and finance as well as trade. That’s after Trump announced new U.S. tariffs on NATO countries that sent troops to Greenland amid his plans to take over the semi-autonomous Danish territory.

At face value, a 10% tariff rising to 25% would have minimal economic consequences, Capital Economics chief economist Neil Shearing said in a note Sunday, estimating they would reduce GDP in the targeted NATO economies by 0.1-0.3 percentage points and add 0.1-0.2 points to U.S. inflation.

“The political ramifications would be far greater than the economic ones,” he warned, with any attempt by the U.S. to seize Greenland by force or coercion potentially leading to irreparable harm to NATO. 

So far, European officials have signaled Greenland’s sovereignty is a red line that’s not up for compromise, while the Trump administration isn’t budging either on its stance.

But the U.S. has a key vulnerability the EU can exploit, according to George Saravelos, head of FX research at Deutsche Bank.

“Europe owns Greenland, it also owns a lot of Treasuries,” he wrote in a note on Sunday.

Holding those bonds helps balance America’s massive external deficits, and Europe is the world’s biggest lender to the U.S.

For example, offsetting the U.S. trade imbalance requires heavy inflows of capital from abroad. Meanwhile, the Treasury Department must also finance budget gaps by issuing more debt, often to foreign investors.

“European countries own $8 trillion of US bonds and equities, almost twice as much as the rest of the world combined,” Saravelos pointed out. “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.”

As Trump threatened to upend global trade and finance last year, Danish pension funds led the charge in reducing their dollar exposure and repatriating money back home, he said.

Such moves represented the “sell America” trade that saw investors dump dollar-denominated assets amid doubts that they would continue serving as safe havens or still deliver attractive returns.

“With USD exposure still very elevated across Europe, developments over the last few days have potential to further encourage dollar rebalancing,” Saravelos added.

At the same time, the euro and Danish krone may see minimal impact from the fallout of Trump’s tariffs on NATO and any subsequent retaliation, he predicted.

That’s as European political cohesion stands to solidify in the face of Trump’s threats, with even right-wing officials previously sympathetic to him now rejecting his heavy-handed approach.

Saravelos sees additional leverage for Europe ahead of U.S. midterm elections with the Trump administration focused on affordability issues. On that front, the EU could influence inflation and Treasury yields, which affect borrowing costs.

“With the US net international investment position at record negative extremes, the mutual inter-dependence of European-US financial markets has never been higher,” he said. “It is a weaponization of capital rather than trade flows that would by far be the most disruptive to markets.”

This story was originally featured on Fortune.com