The conclusion of Davos 2026 was not marked by a return to quiet
diplomacy, but by a tactical retreat delivered with a
signature flourish of brinksmanship.
While President Trump chose to pull back from his immediate
tariff threats, ruling out military force for now, he used
his 80 minute address to explicitly demand the
acquisition of Greenland, stating I want to get Greenland
including right title and ownership for European capitals.
This was less an Armistice than a tactical retreat by a leader
who views alliances as transactional and territory as
real estate. This territorial scuffle bubbled
up and subsided with startling speed.
A weekend of maximalist threats against eight NATO allies led to
a global $1 trillion market sell off on Tuesday, only to be
followed by a framework deal at DAF of US on Wednesday.
Yet while the immediate pressure has eased, Europe is left
wondering if or when this claim will be brought to the fore
again. The crisis has exposed A
fundamental breach of trust that cannot be unseen.
For decades, the transatlantic alliance was an article of
faith. Today we worry that it's
increasingly being treated as a bilateral transaction, where
security is a product and allies are spongers.
This breakdown in trust feels particularly jarring because, on
paper, a conflict between such deeply integrated partners makes
absolutely no sense whatsoever. It brings to mind the central
argument of Norman angels. Nineteen O 9 book The Great
Illusion, Angel correctly identified that the world had
entered an era of globalization where economic interdependence
made war amongst great powers fundamentally irrational.
He famously illustrated the absurdity of modern conflict by
pointing out that Lloyds of London insured the German
merchant marine. Should war break out, the
British Navy would effectively be sinking ships that British
insurers would then have to pay for.
Angel argued that in a credit based global economy, an invader
could not seize A neighbour's wealth without destroying the
foundational systems of exchange that supported their own
prosperity. While his logic was
indisputable, and while every state leader agreed with his
conclusions, history demonstrated just five years
later that just because a conflict is economically self
defeating does not mean that it won't happen.
We're facing a similar paradox today.
While our current era feels significantly more nervous than
the world of 19/09, the lesson remains economic logic is no
longer a reliable guardrail when trust is replaced by coercion.
In just 12 months, the nervous energy in Europe has transformed
into a profound strategic recalculation.
As The Economist has observed, the continent has moved rapidly
through a terrifying progression from wondering if it can defend
alongside America to questioning if it can defend without America
to finally ask, asking what it must do to defend itself from
America. The Greenland crisis was the
catalyst for this realization. To risk the stability of the
entire Western alliance over ownership of an island to which
the US already enjoys unparalleled military access,
and where U.S. companies are already exploring mineral
potential, suggests that we've moved beyond policy
disagreements and into the realm of coercion.
Beyond the Greenland dispute, the broader geopolitical
landscape seems to have shifted towards a state of profound
anxiety. It was once unthinkable to
imagine Canada. Traditionally the US is most
steadfast partner, wargaming A defensive strategy against its
southern neighbor. Yet the current climate has
forced such contingencies into the war room.
For Europe, accepting this new reality means acknowledging that
strategic autonomy is no longer a distant ideal, but an urgent
necessity for survival. However, building this autonomy
will be a massive task, taking years if not decades, as both
Europe and the United States plug critical gaps in their
military capabilities. The transition from the
efficiencies of global integration towards a world of
autarky, a self-sufficient driven by mutual fear, will
impose heavy costs. While the fiscal strain on
national budgets will be immense, the burden will
ultimately be felt by every consumer through higher prices
and by every business through a fragmented, more expensive
landscape for trade. While the Davos climbed down has
lowered the immediate temperature, it hasn't erased
the need to refine the war room plans drafted in European
capitals when the thread of economic warfare and annexation
first hit the wires. Europe's defensive arsenal
against American economic coercion is built on the
realization that if trust is no longer the currency of the
alliance, hard financial leverage must take its place.
This is not an act of aggression, but a reluctant
strategic recalculation, a way for the European Union to assert
it's status as a peer level economy rather than a collection
of expendable vassals, the realization has said in that
relying on shared history is no longer a viable risk management
strategy. If the US is going to treat the
alliance as a series of transactional shakedowns, Europe
has found that it's in everyone's interest to ensure
the costs of those transactions are prohibitively high.
The financial nuclear option is a phrase that has dominated the
headlines, though it's important to note that it wasn't a policy
proposal put forth by any European head of state.
Instead, the idea of weaponizing Europe's 2.84 trillion in
Treasury holdings originated in the research departments of one
of the very institutions that manage them.
George Saravellos, the global head of FX research at Deutsche
Bank, sparked the debate with a blunt memo titled Europe Owns
Greenland. It also owns a lot of
Treasuries. Arguing that the US is reliance
on foreign creditors to pay its bills is its ultimate
geopolitical weakness. This sentiment was echoed by
Rebecca Patterson of the Council on Foreign Relations, who
suggested that even if a total sell off is unrealistic, Europe
could send a devastating signal by simply scaling back exposure
through government affiliated investors like public pension
funds. This argument gained enough
traction that Treasury Secretary Scott Percent felt compelled to
address it at Davos, dismissing the talk as media hysteria and a
false narrative that defied logic.
For all the talk of hysteria, some investors weren't just
listening, they were acting. In the frantic week of the
Greenland crisis, a Danish pension fund announced that it
was divesting its entire $100 million portfolio of U.S.
government bonds, citing the poor health of US public
finances and the unpredictability of the
administration. More significantly, the Swedish
pension giant Elector confirmed that it had trimmed its holdings
by by roughly $7 billion to 9 billion, explicitly citing the
reduced predictability in American policy making as a
growing risk factor. The question, then, is no longer
just whether the idea is on the table, but whether it's actually
a viable weapon. So let's look at whether Europe
could actually follow through with a coordinated strike like
this, or if the financial realities of the 21st century
make this a suicide pact. Beyond the bond market, Europe
has been readying its anti coercion instrument, a trade
bazooka specifically designed to counter economic blackmail.
It's a stark reflection of the current state of affairs that
this tool was originally conceived to defend the bloc
against authoritarian pressure from China and Russia.
It was first proposed after Beijing attempted to blackmail
Lithuania by cutting off trade over its ties with Taiwan.
Seeing it now discussed as a primary defense against the
United States, traditionally a European ally, represents A
surprising and historic shift in the transatlantic relationship.
What makes the ACI so potent is its ability to bypass the usual
veto power that often paralyzes European foreign policy.
Unlike most security decisions that require unanimous consent,
the ACI operates through qualified majority voting, which
means that while 55% of member states representing 65% of the
total population must agree, a single dissenting capital can no
longer block a unified response. It turns European trade policy
into a centralized one for all, all for one defense system.
This tool allows Brussels to move past simple tit for tat
tariffs and unleash a far broader menu of countermeasures.
For instance, the EU could legally bar US tech firms from
bidding on massive public procurement contracts for
hospitals, schools and digital infrastructure, markets where
American vendors currently enjoy a substantial share.
They could also choose to restrict or outright close
access to the EU's 450 million consumer market for U.S.
financial services, hitting Wall Street banks and venture capital
funds where it hurts. In perhaps the most radical move
available, the ACI even allows Europe to revoke the
intellectual property rights of companies from the coercing
country. This would effectively jailbreak
American software and hardware, allowing European firms to
legally ignore US patents and commercial protections within
the single market. While the trade bazooka targets
the digital and financial software of the modern economy,
Europe has also been identifying the industrial hardware
bottlenecks where the US remains critically dependent on Europe.
The centrepiece of this strategy is the Dutch firm ASML, which
holds a global monopoly on the EUV lithography machines needed
to manufacture the world's most advanced computer chips.
Analysts are increasingly describing ASML as Europe's
version of rare earths, a unique technological gatekeeper that
gives Brussels a massive say in the global AI race.
If Europe were to restrict the export, or even more subtly the
servicing of these machines, it would strike a direct blow to
the Silicon Valley innovation engine that the White House
views as its primary strategic asset.
As you'll start to see with many of these solutions, the ASML
chokehold is more of a mutual leash.
While the machines are designed and built in the Netherlands,
they are filled with American made components like the
high-powered Cymer lasers from San Diego.
Under the Foreign Direct Product rule, Washington could veto the
export of any product that contains a significant amount of
US technology. So if Brussels tries to use ASML
as a weapon, the US can essentially brick the production
line by cutting off the American parts and software updates that
keep those machines alive. Leverage isn't just found in
high end silicon, it's also in more basic industrial feedstocks
that keep American manufacturing humming.
The EU has already been treating aluminium and steel scrap as a
critical secondary raw material, moving to restrict its export.
This would hit the US steel makers who rely on using
recycled materials to keep their energy costs down.
By cutting off the flow of specialized chemicals and
industrial products, Europe is signaling that it can clog the
arteries of American industry just as effectively as any
digital lockout. Finally, there's the most
conventional part of the arsenal, the €93 billion or $108
billion retaliatory list of tariffs originally drafted after
the Liberation Day shock of last year.
Liberation Day is on April 1st for those who celebrate it.
These aren't just randomly applied to drive up costs on
European consumers. They're carefully calibrated to
maximize political pain in America while minimizing the
price tag for European voters. By targeting soybeans, for
example, the EU is sending a direct message to the
agricultural heartland that supports Republican leaders like
House Speaker Mike Johnson. The list also features the
classic targets, iconic American products like Harley-Davidson
motorcycles, Levi's jeans, and American whiskey.
These were chosen precisely because they're easily replaced
by European, Japanese, or South American alternatives.
The goal is to make the trade war feel expensive to the
average American voter while ensuring that the European side
of the Ledger remains balanced. As effective as this arsenal of
trade weapons might appear at first glance, it's mostly built
on a series of macroeconomic myths.
In the high stakes theatre of Davos, the threat of a Treasury
dump or a tariff wall makes for great headlines.
But as the dust settles, the economic reality is far more
sobering. The argument that a massive sell
off of U.S. debt by European bondholders would spike interest
rates and bankrupt the US who are highly indebted and trying
to reduce the interest rate on the massive deficit spending
doesn't hold up to scrutiny. For starters, the act of dumping
bonds on such a scale is inherently self defeating.
By flooding the market, you drive down the price of the very
assets you're trying to exit, essentially setting fire to your
own portfolio to spite your neighbor.
Furthermore, once you've dumped the bonds, you're left with U.S.
dollars. You now need to find another
currency to store trillions of dollars of wealth in.
There simply aren't many economies with open capital
accounts liquid enough to absorb trillions in savings.
Large alternatives like China or India have strict capital
controls in place. Even if you pivoted to trillions
in Japanese bonds, Tokyo would likely just recycle those funds
back into U.S. Treasuries, leaving you
indirectly exposed. It just wouldn't work.
The economist Michael Pettis makes a more sophisticated
argument about why this wouldn't work.
He argues that the threat to weaponize Treasuries is a dud
because foreign capital inflows are not a gift to the US, but
instead a burden. The inflows force the US to run
massive trade deficits and pile up debt just to balance the
global Ledger. He explains that you can't
change your capital account without changing the trade
account and you can't change external imbalances without also
changing internal imbalances. According to Pettis, suppression
of consumption in China and other export driven countries
leads to huge trade surpluses in their countries and thus to
large deficits abroad. His argument is that when
capital is not being drawn into a country by the need for
investment, but instead is being pushed in to compensate for
imbalances abroad, like China exporting way more than they
import, the foreign capital doesn't fund investment, it
indirectly funds the consumer or fiscal borrowing.
He argues that if export driven economy stopped storing their
excess savings in American bonds, it would likely help the
US by forcing its trade deficit to shrink and its domestic
savings to rise. This leads into what Martin Wolf
of the Financial Times describes as the lunacy of the current
tariff obsession. Wolf argues that Trump's tariffs
can't actually save American industry.
They'll simply shift domestic production away from the
efficient production of exportable goods towards the
less efficient production of import substitutes.
You might protect a few specific factories this way, but you do
it by making the rest of the country poorer and less
competitive. Richard Salmons of the Brookings
Institute takes this idea further, arguing that the
problem is that world leaders are trying to use microeconomic
tools like tariffs under Trump and subsidies under Biden to
fight a macroeconomic war. These trade tools are blunt
instruments being used to address a system that's actually
suffering from a massive imbalance between what different
nations save and what they invest, which is mostly driven
by consumption suppression abroad.
He argues that these tools treat the superficial symptoms of the
underlying problem with an over prescription of an outmoded
medicine that runs the risk of precipitating A cascading
failure of the patient's vital functions.
Salmons argues that the time is ripe for a new deal, not unlike
the Plaza and Louvre Accords of the 1980s, to be struck among
the major economic powers which would strengthen the growth and
stability of the world economy, an outcome that would be greatly
in the national interests of Europe, China, and the United
States. The US does want to see trade
rebalanced, Europe is prepared to do its part, and China does
seem to have recognized after wave upon wave of supply side
investment stimulus that it is no choice but to boost domestic
consumption in order to maintain sufficient growth in output and
employment. My worry is that people in
positions to make these changes don't understand the nature of
the problem and believe the tariffs or subsidies will fix
everything. As Martin Wolf points out, the
interaction of U.S. trade policy with its fiscal policy offset
each other. The tariffs are supposed to
reduce, if not eliminate, trade deficits, while the large
external deficits mean by definition that the country's
spending more than its income, meaning that it has to buy from
abroad. With the US economy running
close to its potential with very low unemployment, no further
quick way to raise incomes exists, so reducing the external
deficit would require reductions in national spending.
Ultimately, the attacks and counterattacks, meaning the US
tariffs and the European retaliations, simply make
everyone poorer. The true danger, as The
Economist notes, isn't just the shrinking GDP.
It's the permanent evaporation of trust between historically
friendly nations. If we enter an era of autarky
where every nation feels compelled to build its own
redundant, expensive and fragile fortress economy, it's no longer
about more expensive soy or motorcycles.
It's about the end of the efficiency first era, where we
trade the gains of global trade for the expense of redundant
safety of the bunker as capital is diverted in the US and Europe
to military spending. We find ourselves moving from a
world of the great illusion where we believed that economic
ties made war impossible, to a world where the new illusion is
that anyone can actually win in this scenario of growing
hostility between formerly friendly nations.
The Economist warns that while Trump backed down at Davos,
Europeans should still heed the language in his speech, which
betrayed an ominous contempt for Europe and for the value to
America of the transatlantic alliance as it works today.
They warn that if the rest of the world decides that they can
no longer trust America, Germany, Japan, Poland and South
Korea would rush to rearm and possibly seek nuclear weapons.
Proliferation, they argue, would curb the value of America's own
arsenal and inhibited statecraft.
They argue that China and Russia won't necessarily agree with Mr.
Trump on where America's influence ends and theirs
begins, and this might lead to a war so devastating that America
could not stay out of that. Thanks for tuning into the
podcast, with special thanks to my supporters on Patreon whose
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Have a great week and talk to you again soon.
Bye.