Its position as the largest external holder of US federal debt – with roughly $12.6 trillion exposure – could give Europe some financial leverage should relations with Washington deteriorate, as we saw happening with the case of Greenland. This question, which has recently popped up in some media outlets (Wigglesworth and Nangle 2026), arises naturally at a time when cross-border economic ties are increasingly entangled with geopolitical considerations. In practice, however, Europe’s US debt holdings offer little scope for strategic deployment as they are fragmented across jurisdictions and institutions, and efforts to weaponise them for political purposes would largely backfire.

Marginal demand and the limits of financial influence

The key analytical distinction is between existing asset positions and the behaviour of investors at the margin. Conflating the two obscures the mechanisms through which financial influence, if any, could plausibly operate.

Two qualitatively different dynamics are often treated as interchangeable. One involves gradual portfolio adjustment, as investors reduce the pace at which they add US assets, based on the expected risk–return balance. The other involves deliberate, coordinated action in which existing holdings are deployed as a bargaining chip. Only the former is economically and institutionally palatable. The latter lacks credibility and would entail substantial self-inflicted costs.

For this reason, arguments that infer leverage directly from the size of Europe’s Treasury holdings misidentify the relevant mechanism. Influence does not stem from liquidating outstanding positions, which would be destabilising and value-destructive, but from shifts in future demand. The relevant choice is therefore intertemporal: whether to continue supplying marginal financing to the US over time.

The self-limiting nature of asset liquidation as policy instrument

Any attempt to extract influence through large-scale sales of US Treasuries would impose immediate losses on European holders. Rapid divestment would push yields higher, depress the valuation of remaining holdings, tighten global financial conditions, and generate spillovers into European sovereign and bank funding markets.

Because the losses would materialise quickly and disproportionately on the seller, liquidation lacks credibility as a strategic threat. Using the instrument would erode the balance sheet positions from which influence is presumed to arise. This explains why, historically, adjustments in reserve and portfolio composition have rarely taken the form of abrupt exits. Instead, they occur through reduced accumulation at the margin, gradual rebalancing, and slow substitution across assets.

Marginal financing, portfolio dynamics and constrained influence

The analytically crucial issue is not whether US sovereign debt can be transformed into an instrument of coercion, but whether foreign investors will continue to supply the incremental financing on which US fiscal dynamics depend. In Treasury markets, prices are set at the margin, making the behaviour of foreign buyers relevant over time.

From this perspective, Europe’s strategic relevance lies not in any credible threat of liquidation, but as a source of ongoing demand. Changes in marginal demand affect yields, term premia, and exchange rate expectations, but only gradually.

This mechanism, however, limits the scope for turning holdings into leverage. Adjustments in flows occur slowly, as portfolios are reallocated over years, reflecting decisions by private institutions responding to returns, benchmarks, hedging costs, and liquidity requirements. Accordingly, Europe’s existing stock of US assets cannot be mobilised effectively as leverage in a confrontation.

What China’s experience really shows (and what it doesn’t)

China’s experience provides a useful benchmark. Over the past decade, adjustment occurred through a slower pace of reserve accumulation and changes in the composition of foreign asset holdings, rather than through attempts to deploy Treasury holdings strategically (Ahmed and Rebucci 2025, Subacchi and van den Noord 2025).

Consistent with this approach, reported Chinese holdings of US Treasuries have declined to approximately $700 billion, from a peak of around $1.2 trillion in 2015. These figures likely understate total dollar exposure, given shifts within the broader state sector – including state-owned banks – and the use of offshore financial centres. Nevertheless, the central point remains: adjustment took place incrementally at the margin rather than through attempts to deploy the existing stock strategically.

The case for a gradual reduction in Europe’s Treasury demand

Absent a credible financial instrument for strategic use, a more consequential issue concerns the sustainability of Europe’s demand for US Treasuries. The question is whether continued accumulation remains economically justified in an environment of higher perceived default risk and a declining convenience yield amid increasing global fragmentation.

Foreign demand for US sovereign debt traditionally rests on three components: perceived safety, systemic convenience, and intertemporal returns. Evidence suggests that all three have weakened.

Concerns over safety are not about an imminent technical default, but about the normalisation of policy options once considered implausible, including selective default, political interference with debt servicing, and asymmetric treatment of foreign creditors, as suggested by Stephen Miran (2024), a current member of the Federal Reserve Board of Governors. When positions are sizeable and investment horizons extend over long periods, even modest increases in perceived default risk can materially affect portfolio allocation. At higher default risk will sharply reduce foreign demand for US debt and puts upward pressure on yields (Subacchi and van den Noord 2026).

A second component is convenience. US Treasuries derive value not only from their credit characteristics, but also from their central role in a dollar-based trading and financial system. This convenience yield is contingent on openness. Trade restrictions, tariffs, and broader geoeconomic fragmentation weaken the transactional demand for dollar liquidity. As trade becomes more regional and home bias increases, demand for dollar-denominated safe assets declines. Our work, reported in an earlier column (Subacchi and Van den Noord 2025), shows that increased home bias in trade – used as a proxy for fragmentation – significantly reduces foreign investors’ demand for Treasuries, even when yields rise.

The third component is the intertemporal return trade-off. Historically, foreign investors have been willing to accept lower current returns on US debt in exchange for long-term stability, liquidity, and currency strength. That trade-off becomes less favourable when persistent fiscal expansion is combined with trade barriers and signals of limited concern for creditor interests. Higher yields may offer short-term compensation, but they also imply future adjustment through currency depreciation. Once exchange rate dynamics are incorporated, the long-run return advantage diminishes substantially.

Taken together, these considerations suggest that Europe’s exposure to US Treasuries reflects choice rather than constraint. Continued accumulation is driven largely by private investors responding to yield differentials. However, yield should not be conflated with safety, nor short-term performance with intertemporal value. Therefore, the heyday of US debt as a safe investment may well be at risk.

Conclusion

Europe’s US asset holdings do not constitute a credible instrument of coercion as they are institutionally fragmented while large-scale divestment would be economically counterproductive.

This does not imply stability of the current allocation. The interaction of trade restrictions and rising perceived default risk can materially weaken European demand for US Treasuries. These issues have become more relevant in light of fiscal and trade policy developments under the Trump administration, including proposals that raise the prospect of default or selective restructuring of US foreign liabilities.

If Europe’s exposure to US assets declines, the adjustment is unlikely to occur through coordinated action. Instead, it would take the form of reduced net purchases, increased use of currency hedging, a rise in home bias within portfolios, and incremental reallocation toward euro-denominated safe assets. This is not leverage in a narrow sense, but it is the mechanism through which the global financial equilibrium would adjust.

The appropriate policy response is structural rather than tactical. Strengthening the depth and liquidity of euro-denominated safe asset markets, improving coordination in reserve and public asset management, and expanding the set of credible domestic investment options available to European savers should take priority (Landau 2025). Over time, such measures are likely to reshape the international financial equilibrium more effectively than reactive responses.

References

Ahmed, R and A Rebucci (2025), “A ‘reverse conundrum’ and foreign official demand for US Treasuries”, VoxEU.org, 15 January.

Landau, J (2025), “A world with no safe assets”, VoxEU.org, 6 June.

Miran, S (2024), A user’s guide to restructuring the global trading system, Hudson Bay Capital.

Subacchi, P and P van den Noord (2026), “Could Europe continue to fund U.S. Federal debt?”, working paper.

Subacchi, P and P van den Noord (2025), “International trade suppression and the demand for US Treasuries”, VoxEU.org, 11 April.

Wigglesworth, R and T Nangle (2026), “Could Europe really leverage its $12.6tn pile of US assets?”, FT Alphaville, 19 January.