Fed up with Donald Trump? I am, you are, and after his threats to annex Greenland, and the reckless attack on Iran, so are most European governments. But having made ourselves dependent on the US for strategic defence enablers such as satellite communications, nuclear weapons and intelligence, Europeans seem collectively powerless.
The overall Trump strategy is for the US to borrow its way to prosperity while forcing the rest of the developed world to lend, at knockdown interest rates, using economic coercion – tariffs and trade distortions – together with threats to pull support for Nato.
Meanwhile, Trump is systematically destabilising the global economy in ways that benefit the US: triggering the closure of the Strait of Hormuz is, as Trump stated openly, more of a problem for India, China and south-east Asia than it is for America.
European states are capable of being held hostage not because of the intrinsic flaws in our economies – though there are important weaknesses – but because of the power of the dollar.
Out of $13tn in global central bank reserves, 57% are held in US dollars. Of $30tn of the US’s outstanding debt, $1tn changes hands on global markets every day. Meanwhile, 89% of foreign exchange transactions involve the dollar. When it comes to trade, though the US accounts for just 10% of transactions, more than half are billed in dollars.
Because commercial banks outside the US have issued loans denominated in dollars to the tune of $18tn, the “swap lines” between the US Federal Reserve and the central banks of Japan, Canada, the UK, eurozone and Switzerland are critical to the architecture of global capitalism.
Under this arrangement, the Fed lends money to foreign central banks, who post their own currency as collateral. If that were to stop, especially in a time of stress like today, the global financial system would collapse, to the detriment of everyone who isn’t holding dollars. So Trump, for now, holds all the cards.
But there is a solution, and it’s been staring European policymakers in the face for more than a decade. Europe should issue its own bonds and seek to end the dependence of its finance system on US Treasuries.
Probably the biggest anomaly in the global system is that the eurozone does not issue bonds in its own right. Instead, sovereign debt is mainly issued by the constituent eurozone countries, whose bonds attract interest rates according to supply and perceived risk: German bunds are in short supply, and currently yield 3.1%, while Italian debt, more plentiful and riskier, attracts 4.1% at time of writing.
As a result, there is a shortage of domestic safe assets in Europe, and chronic reliance on the dollar.
Ever since the eurozone crisis of 2011, economists and think-tankers have been proposing the creation of a European Safe Asset – a common bond, issued by the European Union, backed by the biggest economy on earth.
It took the Covid pandemic to trigger movement on this, with the creation of NextGenerationEU bonds (NGEU). These have allowed the EU to raise €637bn – but are not classed as “supranational” rather than true “sovereign” debt, and were explicitly designed to be temporary. That pushes up the interest rates paid, and means many banks can’t treat them in the same way as they do US Treasuries. And in any case, this borrowing line ends at the end of 2026, with the last loans due to be repaid in 2058.
But the influential Draghi Report issued in September 2024 proposed a true, sovereign eurobond, making the NGEU model permanent and doubling the amount raised. Last year, the former ECB economist Olivier Blanchard proposed something much more ambitious: a $5tn eurobond issue, to mop up the debts of high-risk countries and allow greater investment – a proposal that found support from board members at the European Central Bank.
European states with good credit ratings and low debt-to-GDP ratios have always opposed the idea of a common debt instrument. Until now they had no material interest in spreading their debt obligations with profligate countries. Germany in particular, together with the Netherlands, Austria and Finland, were always opposed.
But the Trump chaos machine could change the game. Germany’s decision to remove defence spending from its fiscal rules will put it on a course for debt to reach 100% of GDP. Denmark, whose debt-to-GDP ratio is extraordinarily low, just confronted the possibility of having to fight America on the runway of Nuuk airport. And the whole continent’s economy is set to be smashed by energy inflation as the Iran conflict drags on.
So the European Safe Asset proposal should morph from a radical solution to economic stagnation and stress into a vital geopolitical weapon.
It is one thing for the European financial system to rely on US bonds as their safest asset in peacetime. It is another altogether when the US is slapping tariffs on our goods, undermining our democracies and recklessly destabilising the global energy market.
So the time has come for European countries – ourselves included – to consider creating a massive, common debt instrument.
We saw, last year, that what forced Trump to U-turn on his swingeing global tariff offensive was the sudden dumping of US Treasuries by the countries affected. It is also likely that the dumping of Treasuries by Danish funds during the Greenland crisis influenced his decision to de-escalate.
Because when the interest rate on Treasuries rises to 5% – as it did briefly during last year’s tariff standoff – all of America suffers. The interest rates on everything from car loans to mortgages are pegged to the bond yield. Plus, the US government is running a budget deficit close to $2tn – so any increase in its borrowing cost hurts badly.
Britain, though not in the EU, could have as much skin in this game as it wanted. We are the second biggest holder of Treasuries after Japan, and London is the most important trading hub for US debt.
China is trying actively to build an alternative to the dollar as a global reserve currency – and though the UK has no interest in seeing the Chinese renminbi replace the dollar, it has every interest in seeing Europe create a counterweight.
For, if the world is breaking up into rival trading blocs, and we are committed both to the defence of Europe and trade with it, it is in the UK’s self-interest for this vast, successful economy to have its own sovereign debt instrument, which banks can safely hold as collateral.
Right now, European patience with Trump is strained to the extreme. Even the most fiscally hawkish parties can see the danger in Trump’s unequal bargain: you finance our debt, but we exclude your exports.
Instead of playing its usual game of wait and see, balancing between the two massive economies of the US and Europe, the UK should signal its willingness to support the regulatory changes the European Commission and the ECB might need to make Blanchard’s $5tn debt project work, and to open London as a trading hub for such debt. It would shatter the foundations of the post-1974 global economy – but to be frank, they look pretty shattered anyway.
