Could Europe's Financial Regulators and Treasury Bonds Be the Key to Managing Trump?

By Paul Hannon

Could Europe's best hope of fending off further attacks from President Trump lie in some obscure financial regulations? Researchers at Germany's influential Kiel Institute for the World Economy think so, having spotted what they believe is a vulnerability in the world's largest economy.

Since Trump's return to the White House, some of his actions have been seen by European Union leaders as hostile, including an increase in tariffs on imports from the bloc, threats to take control of Greenland, and a reduction in support for Ukraine as it repels Russia's invasion.

Most recently, the U.S.-Iran war sent energy prices soaring, threatening harm to Europe's economy.

Europe has struggled to come up with a response, beyond questioning the logic of the repeated attacks on supposed friends.

"I don't know why the president of the United States behaves like this with his own allies," said Italian Prime Minister Giorgia Meloni, in a recent response to a perceived slight. "It's a shame that he doesn't have the same determination toward the enemies of the West, the enemies of the United States."

In the case of tariffs, the bloc ran a trade surplus with the U.S., so would likely have suffered more had it chosen to retaliate and escalate. It is not yet in a military position to stand alone against a potential Russian invasion.

Looking for chinks in America's armor, Filippos Petroulakis of the Bank of Greece and Farzad Saidi of the University of Bonn focus in a paper published Tuesday on the fact that while European investors own $9.6 trillion in U.S. assets, U.S. investors own just $6.4 trillion in European assets. That creates what they regard as an "asymmetry" that "properly harnessed" could help level the playing field.

"Europe holds significant and underappreciated financial leverage over the United States-leverage that can be activated through existing regulatory architecture without requiring new institutions, treaty changes, or explicit coordination of government asset sales," they wrote.

Reducing European investments in the U.S. would, they argue, be more painful for the U.S. than it would for Europe, since it would lower demand for Treasury bonds, pushing yields higher and therefore increase the cost to the government of servicing its large debts.

The two researchers argued that the most effective way to lower European holdings of Treasury bonds would be to remove the "privileged" treatment they receive under current European financial regulations, including Solvency II -which covers insurance companies-and the Capital Requirements Regulation, which affects banks.

At present, neither type of financial institution has to set aside capital to cover a potential failure of the U.S. government to repay its debts. The researchers argue that zero-risk weighting is a "regulatory subsidy with no remaining macroprudential justification" given that the U.S. government's debt has risen rapidly and is set to increase further, a trend that has already prompted a number of downgrades by ratings agencies.

"Removing this subsidy would increase the capital cost of holding U.S. Treasuries, generating incentives to divest across the European financial system," the researchers wrote.

Petroulakis and Saidi estimate that European insurers would reduce their holdings of Treasuries by $48 billion over the course of a decade if the risk weighting was higher, while banks responding to a 20% risk weighting would cut their investments by $130 billion, and pension funds would trim a further $24 billion.

But it would not take a decade for such a move to have a big impact on U.S. borrowing costs.

"What matters is the credible, permanent removal of a class of structurally reliable buyers," the researchers wrote. "Because asset prices are forward-looking, the announcement of a regulatory regime change reprices the entire expected path of future demand-not merely the first year's selling."

They estimate that such a reduction in demand would push yields high enough to increase the U.S. government's borrowing costs by between $33 billion and $42 billion annually. According to the Treasury, interest payments on its debts are set to total $867 billion in the 2026 fiscal year.

There would be a benefit to Europe in addition to a cost to the U.S., the researchers argued.

"Removing the zero risk weight privilege simultaneously renders European sovereign bonds and highly-rated European bank bonds more attractive on a risk-adjusted basis," the researchers wrote.

Write to Paul Hannon at paul.hannon@wsj.com

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June 23, 2026 09:14 ET (13:14 GMT)