Self-inflicted FAFO moment for the Eurotards

Key Markets report for Wednesday, 10 December 2025

A number of analysts have characterized the new U.S. National Security Strategy (NSS25) as a declaration of war on Europe. That’s certainly an exaggeration, but the way some Europeans reacted to it, you’d think they believe as much themselves. Perhaps we could characterize it as a declaration of Cold War: U.S. policy really did take a radical turn.

Since 1948, the U.S. was almost completely aligned with Europe. With respect to NATO, the alliance’s continued expansion was the unquestioned policy constant since the end of the Cold War. American administrations under Clinton, Bush43, Obama and Biden all drove NATO eastward toward Russia’s border. Now Trump pulled the handbrake on that agenda.

Having digested the NSS25, the reactions from Europe’s officialdom ranged from denial to outright fury. Our brilliant EU Commissioner for Foreign Affairs, Kaja Kallas went with denial but elsewhere, furious countermeasures were being considered:

Insiders informed the WSJ that European leaders are weighing severe countermeasures in response, calculated to trigger economic turmoil across the United States. The proposed strategy includes liquidating trillions in American government bonds held by European governments.

The potential consequences of such measures are quite obvious: they could cause a crash in the U.S. dollar’s exchange rate, collapse the price of U.S. Treasuries and inflate the interest rates along with the U.S. government’s borrowing costs. In all, this could be a painful blow for the U.S. economy. Some “prominent European economist described the plan to the WSJ as a potential financial backlash that could hit the US harder than any external shock in modern history.”

I don’t know who this “prominent European economist” might be, but my take is that they haven’t thought things through. In venting such consequential threats, the hysterical Eurotards are again committing a number of cardinal unforced errors, and the farther they take this adversarial posturing, the more the costs of their errors will compound.

Damage is already done

Perhaps the worst part of the damage has already been done: it finally tore the mask off of European ruling establishments and “their values.” The copout that, “we’re nice and blameless, we only support the Americans as loyal allies” now fell apart, revealing the Europeans as hypocritical, callous warmongers who can’t seem to let go of their colonialist heritage.

Threats directed at the U.S. also show their latent contempt towards the boorish Americans and mark Europe as an enemy in the eyes of much of the U.S. public. They also validate Trump’s policy and push the United States closer with its old natural ally, Russia. In case this last sentence sounded strange, Russia and the United States were allies and had a very close friendship throughout the 19th century until the first World War. I expect that Trump and his administration won’t fail to capitalize on these gifts from the inept and reckless Europeans.

But on a more pragmatic level, Europeans don’t seem to be aware whom they are threatening nor what cards the United States has to play in this conflict. The obvious one is tariffs and Trump will probably welcome any justification to hit the Europeans with 500% tariffs if he can get away with it, depriving European exporters of the world’s largest consumer market.

Beyond tariffs, the Europeans are forgetting that the United States still controls the world’s most important trade settlement currency and that if you want to have U.S. dollars to purchase imports like crude oil, natural gas, coal, steel, coffee and rice you need U.S. dollars. Without dollars, Europe’s foreign trade could collapse. I wrote about that in the 15 May 2025 TrendCompass titled, “Fear of Trump grips the Eurozone.” Here are a few excerpts:

“… the supervisors at the European Central Bank are worried about Eurozone banks’ exposure to US dollars and access to dollar liquidity in conditions of stress. … ECB officials are concerned that under the Trump administration, Eurozone banks’ access to US dollars could be cut.

The Fed has lending facilities in place to provide dollar liquidity for Eurozone banks … ECB officials are concerned that this could change in the future. According to the latest figures, as much as 17% of Eurozone banks’ funding is in dollars. … The Fed has repeatedly bailed out European banking system: during the 2008 Financial Crisis, it provided a $110 billion swap line for the ECB; during the 2011 Euro crisis, it backstopped Eurozone banks with an unlimited swap line, and during the Covid pandemic it stepped up again with a $159 billion swap line.

But if the Fed’s policy changes, the next crisis could be brutal. … the resulting scramble for dollar liquidity could cause a sharp rise in EURIBOR and LIBOR funding rates, which would, in turn, cause a dollar refinancing crisis for European companies which depend on US dollar loans. This, in turn, could trigger a seloff of euro-denominated assets to raise cash and buy dollars, leading to further depreciation of the euro.

Should the dollar shortage persist, we could see corporate defaults and bank runs in the Eurozone. The ECB would have to step in to bail out the weak banks, pushing bond yields significantly higher. This could cause many weaker banks across the Eurozone, particularly Italian and Greek banks, to collapse. Ultimately, the ECB could lose control of the situation, leading to hyperinflation if it prints too many euros, or a deflationary depression if it acts too conservatively.

In conclusion, I foreshadowed the unfolding crisis:

“A new Eurozone crisis is not yet on the horizon, but it could materialize for a variety of reasons, including the imminent failure of Project Ukraine. After considering the possible effects of such a crisis, it is not difficult to appreciate the power which the US administration holds over the EU’s future, its economy and its financial system. … From what we have seen, Trump and his cabinet appear to be outright irritated with their EU ‘allies’ … If a crisis does occur - it’s more a question of when than of if, it will likely escalate quickly and quite bigly.

Well, the when seems to be now and the storm is upon us. It’s the FAFO moment for the Eurotards: the more they fool around, the more they’ll find out and the capital markets will be the first to provide the lessons: in this morning’s trading, the German bund touched a new post-2011 low at 126.86. There might be a deep precipice from here. With the leaders we have, we need no enemies. The Americans and the Russians can just sit back and watch the loony asylum consume itself.

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Today’s trading signals

With yesterday’s closing prices we have the following changes for the Key Markets portfolio: