Can Europe achieve strategic financial autonomy without US institutional investors? Now, there’s a question. After all, US asset managers and owners represent the world’s deepest capital pools and are the largest foreign holders of European sovereign and corporate debt, and are the marginal price setters in global markets. So, the instinctive answer is no.

But why do I even ask, let alone hint at the extreme tail-risk scenario of a sudden withdrawal of US money? Because we are living in a dangerously fragile geopolitical reality; and, even though a rupture between Europe and the US is still remote, it’s far from the fantastical scenario it might have been until fairly recently.

So, with apologies to the late Robert M Pirsig for my playful title, I thought I’d continue my narrative on vulnerabilities around Europe’s lack of financing autonomy by running a highly stylized ( and rather simplistic ) macro-financial stress test-lite using some highly abstracted numbers against what many might see as an implausible scenario that at the same time suspends certain realities around how bond and foreign exchange markets might function in the real world. But bear with me.

All things being equal, the likelihood of US investors exiting Europe’s bond markets en masse is zero. But geopolitical rupture would mean all things would not be equal. That elevates my stress test-lite from the realm of science fantasy into strategic plausibility, with the potential for dollar rationing, capital controls or financial coercion. The US has the legal and institutional machinery to weaponize capital flows through sanctions, clearing control and dollar settlement infrastructure.

Where to start? Well, in an open letter to European leaders the other day, the chief executives of 11 European banks representing well over half the region’s bank assets stated that banks provide around 75% of all financing in Europe. Assuming the European share of that more or less holds, financing vulnerability sits in the market-based quarter. So, that’s what I stress-tested.

Euro debt holdings

To do that, I created a stylized holdings map of the estimated €25 trillion ( US$29.07 trillion ) to €30 trillion in outstanding euro-denominated sovereign, corporate and financial debt, and asset-backed securities, using the mid-point as a starting point. Beneath that, I focused on the 80% to 85% of the €27.5 trillion sold by euro area issuers. A reasonably defensible assumption would be that 25% to 30% of that is held by non-euro area investors: call it €6.25 trillion.

And then let’s say that roughly 40% of that number is in the hands of nominally ‘safe’ holders i.e. other European but non-euro-area investors ( UK, Swiss, Nordic, etc ). That leaves 60% of euro debt issued by euro-area issuers held by investors from the rest of the world, mainly the US and Japan ( the latter a hardened capital exporter and likely to remain so ).

I concluded that a geopolitically motivated exit of US buyers en bloc would leave a purely directional notional holdings gap of €2 trillion that would need to be substituted.

New issue bid

Stock is only part of the story: Europe relies on a robust foreign bid for new issuance. A third of that comes from US investors so their exit would remove a structurally important  marginal buyer. European issuers ( sovereigns, corporates, financial institutions ) sold US$1.98 trillion equivalent in syndicated debt in 2025 in all currencies, according to LSEG data. Including government bonds and bills sold through debt auctions, European governments issued €3 trillion as of Q3 2025, according to the Association for Financial Markets in Europe’s Government Bond Data Report, with €4 trillion annualized.

Dollar debt substitution

Eurozone issuers are also large borrowers in dollars. Triangulating Bank of International Settlement  and International Monetary Fund position data suggests that in the order of US$1 trillion of dollar-denominated debt issued by euro area residents is held by US investors. In a rupture scenario, this too would need to be replaced.

Corrective forces

So far, so scary. But remember that the eurozone is a massive global creditor, with external assets in the order of €35 trillion to €40 trillion. Combining the euro- and dollar-denominated replacement layers implies Europe would need to mobilize a 15% to 20% reallocation of its external asset portfolios to neutralize the imbalance. Large, but not impossible. And, of course, if asset rotation can be executed over time, the problem isn’t as acute as it appears.

A US investor exit would initially trigger market disorder and drive extreme volatility. An emergency on this scale would demand large-scale central bank intervention. But over time, if it kick-started an eventual repatriation of European capital flows, that would dramatically change the stress dynamics.

The fact that the Eurosystem collateral framework has been upgraded also hugely changes the stress dynamics: from 30 March 2026, marketable assets in US dollars ( as well as yen and pound sterling ) issued in a euro area member state will for the first time be eligible as permanent collateral. This adds a strategic pressure valve designed to soothe exactly the kind of the geoeconomic volatility I’m talking about.

This arrangement will enable European investors to sell dollar bond holdings to their banks, which can submit them as collateral in return for euros, which can be passed back to fund the great rotation. Having the banks and the European Central Bank act as shock absorbers would prevent investors being forced to sell at distressed prices.

This institutional valve would be mirrored by a market-driven one: in the event of a mass US exit, the euro would likely undergo a sharp, reflexive devaluation against the dollar. Provided institutional continuity is preserved, that would create two powerful corrective forces.

First, European debt would become historically cheap for non-US global investors ( sovereign wealth funds, Asian central banks ). Second, it would present European institutional investors and banks with a euro windfall. Selling US dollar assets to buy higher-yielding euro debt would not just be a strategic necessity, but a highly profitable carry trade.

Transmission mechanisms

Referring back to that open letter I referenced at the top from the 11 bank CEOs, if banking is integrated into the capital markets-focused “One Europe, One Market” roadmap to complete the EU single market – as the bank chiefs called for – and completing the banking union is given the same degree of urgency as capital markets union, the risks would become less acute.

The banking system acts as a key transmission mechanism to absorb shocks in distressed markets. The missing line of defence in a geopolitical crisis affecting Europe is not just capital but the institutional architecture needed to move capital quickly, safely and across borders.

So Europe does in principle possess the capacity to transform a dangerous funding cliff in gross terms into an initially painful, but ultimately self-correcting, capital reallocation shift. But the dividing line separating the two outcomes is thin and fragile. Harmonization, anyone?