Can Europe win a war against the U.S.?
- Gabriela Galeena
- Jan 21
- 4 min read
When markets turned volatile in January 2026, it wasn’t because of a financial scandal or an economic shock. It was geopolitics, once again, forcing its way into portfolios.
What began as a political dispute involving Greenland has grown into something much larger. Investors are no longer asking who is right. They’re asking something far more consequential:
If tensions escalate, can Europe actually stand up to the United States?
Not with tanks or missiles, but with money, trade, and financial pressure.
This Is Not a Military War, and Everyone Knows It
Let’s be clear upfront: this is not a military confrontation.
Greenland is part of the Kingdom of Denmark, and Denmark cannot challenge the U.S. militarily. Neither can the European Union as a bloc, at least not in a way anyone is seriously considering. There has been no appetite within the EU or NATO for escalation through force.
And that’s precisely why this standoff is interesting.
Because when military power is off the table, economic power takes centre stage.
Europe’s message so far has been consistent: sovereignty matters, international law matters, and economic pressure is where the real leverage lies.
America’s Vulnerability: Debt, Inflation, and Interest
Rates
The United States enters this confrontation with a major weakness, one that markets understand very well.
U.S. public debt has climbed to $38.43 trillion, and interest payments are expected to reach $1 trillion annually in 2026. Servicing debt has become one of the government’s largest expenses.
Since returning to the office, Donald Trump has repeatedly pressed the Federal Reserve to cut interest rates and ease this burden.
But there’s a problem.
Inflation remains sticky, and new tariffs, particularly on European goods, risk pushing prices even higher. That leaves the Fed trapped between two bad options: cut rates and risk inflation, or hold rates high and let debt costs climb.
The result is an uncomfortable trio: high debt, persistent inflation, and elevated interest rates.
For markets, that combination is combustible.
So Can Europe “Win” by Selling U.S. Treasuries?
This is where the debate heats up.
Some argue Europe could retaliate by selling U.S. Treasury bonds, driving yields higher and making U.S. borrowing more expensive. In theory, higher yields mean higher interest costs and political pressure in Washington.
In practice, this would be a warning shot, not a knockout blow.
The U.S. Treasury market is the largest and most liquid bond market in the world. U.S. banks, the Federal Reserve, and other global investors would likely absorb any large-scale European selling. A collapse is highly unlikely.
But here’s the key point: the signal matters more than the size.
With debt already so high, even small increases in yields translate into billions of dollars in extra interest costs. When a government is already paying close to $1 trillion a year just in interest, markets become extremely sensitive to rate movements.
Why Europe’s Financial Signal Carries Weight
European countries collectively hold around $8 trillion in U.S. bonds and equities, nearly twice as much as the rest of the world combined, according to Deutsche Bank.
Denmark itself is a small holder. But symbolic moves matter.
When Denmark’s AkademikerPension decided to sell its U.S. Treasury holdings even while maintaining broader U.S. exposure, it sent a message far louder than the size of the trade.
It said: long-term investors are reassessing U.S. risk.
That’s not market panic. That’s confidence being questioned.
Europe’s Real Playbook: Trade, Not Turmoil
Despite the attention on Treasuries, Europe’s likely response is far more measured and far more powerful over time.
According to recent reports, options being considered include:
Retaliatory tariffs on U.S. exports
Use of the EU’s Anti-Coercion Instrument
Reassessment or suspension of EU-U.S. trade cooperation
Coordinated legal and diplomatic pressure
These tools aim to raise the cost of escalation without destabilising markets.
And the stakes are enormous.
Together, the EU and the U.S. account for nearly 30% of global trade and 43% of global GDP. In 2024 alone, bilateral trade reached €1.68 trillion, more than the entire GDP of Spain. Mutual foreign direct investment exceeds €5.3 trillion.
This is not a relationship either side can afford to rupture lightly.
Why Markets Reacted So Strongly
The January sell-off wasn’t about Greenland alone.
It was about something deeper: Geopolitics is now feeding directly into interest-rate expectations.
When debt levels are high, mistakes get expensive fast. That’s why bond yields rose, equities fell, and investors moved toward safer assets.
This wasn’t panic. It was risk being repriced in real time.
The Bigger Question Investors Are Asking
So, can Europe “win” a war against the United States?
Not in the traditional sense. But this isn’t that kind of war.
In today’s world, power is exercised through trade flows, capital allocation, and financial confidence. And in that arena, Europe has far more influence than it appears at first glance.
Greenland may have sparked the confrontation, but the real battle is about something larger: how fragile the global financial system becomes when geopolitics collides with debt.
In 2026, that balance matters more than ever.
Disclaimer: This content is for educational purposes only; please conduct personal research and consult a qualified investment advisor before making any investment decisions.
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