European investors, holding a substantial $8 trillion in U.S. stocks and bonds, are reportedly reconsidering their exposure to U.S. assets, raising concerns about a potential debt war. Danish pension funds have already begun divesting from Treasury bonds, influenced by worries over U.S. debt and President Trump's unpredictable policies, including the Greenland acquisition proposal.

Of the $8 trillion held by European investors, $3.6 trillion is in Treasury debt. This represents approximately a third of U.S. government bonds held overseas, or about 10% of the overall Treasury market. Capital Economics noted that European holdings have nearly doubled since 2019, making them a significant player in the U.S. debt market.

Despite the concerns, analysts believe a large-scale sell-off of Treasuries by European investors is unlikely due to the potential for significant market disruption. Shifting such a massive amount of capital into alternative investments would likely cause those asset prices to surge, while simultaneously destabilizing the U.S. Treasury market. This dynamic gives the U.S. what some analysts are calling "escalation dominance" in a potential debt war, as Europe would likely face a violent market crash if it dumped Treasuries.

The situation arose following President Trump's controversial proposal to acquire Greenland and subsequent threats of tariffs on NATO allies. While Trump later retreated from the tariff threat, the diplomatic and financial damage had already been done, contributing to a weakening dollar and prompting European investors to re-evaluate their U.S. holdings.

Looking ahead, the future of European investment in U.S. debt remains uncertain. While a complete divestment is considered improbable, continued concerns over U.S. fiscal policy and geopolitical unpredictability could lead to a gradual reduction in European exposure to U.S. assets, potentially impacting Treasury yields and the dollar's strength.