The U.S. has ‘escalation dominance’ in a debt war: Europe would face a violent market crash if it dumps Treasuries

President Donald Trump retreated from this threat to impose tariffs on NATO allies in response to his plan to take over Greenland, but the damage has been done, diplomatically and financially.

The dollar has continued to sink, and top investors in Northern Europe are reportedly re-evaluating their exposure to U.S. assets, while Danish pension funds have already dumped Treasury bonds.

Part of that is because of concerns over U.S. debt, but Trump’s Greenland crisis and his continued unpredictability have also fueled calls for Europe to weaponize its capital. In fact, European investors own $8 trillion in U.S. stocks and bonds, with $3.6 trillion of that in Treasury debt alone.

Europe accounts for about a third of U.S. government bonds held overseas, or roughly 10% of the overall Treasury market, after nearly doubling its holdings since 2019, according to a note Wednesday from Capital Economics.

But it’s precisely this massive stockpile that makes it unlikely Europeans will suddenly sell Treasuries, because moving around that much money would roil financial markets.

Why the U.S. has ‘escalation dominance’

Shifting into alternative investments would send those prices soaring and reduce their expected returns, the note said. Other safe havens, such as the Swiss franc and gold, have already appreciated so much that they offer negative real yields.

“Not only would it come at a financial cost, it would invite a response in kind: US investors hold large amounts of European government bonds too!” Capital Economics deputy chief markets economist Jonas Goltermann added. “Beyond that, European banks remain reliant on dollar funding that is ultimately backstopped by the Federal Reserve. ‘Escalation dominance,’ to use the military phrase, is firmly in favour of the US.”

Michael Brown, senior research strategist at Pepperstone, also pointed out that a significant chunk of Europe’s U.S. holdings is for collateral or cash management purposes, not due to discretionary investment decisions.

In addition, even in those discretionary cases, private investors hold the U.S. assets, meaning any government mandates to sell them would be nearly impossible, he said in a note Wednesday.

Dumping Treasuries would hurt Europe

If Europe unloaded its Treasuries, bond prices would tumble “in very violent fashion,” with spillover effects elsewhere—including in the eurozone, where borrowing costs would spike.

The currency market would also experience upheaval as the euro would soar, representing a major headwind on the eurozone’s exports and economic growth, Brown added.

“A more practical option, if capital markets were to be seriously considered in any European retaliation, would be a ‘buyer’s strike’ at upcoming Treasury auctions, though even that would be a relatively difficult step to actually enact,” he explained.

This story was originally featured on Fortune.com