The $200 Billion Leverage: What the Kiel Institute Study on Europe and US Treasuries Really Means

A significant new study from the Kiel Institute for the World Economy has detailed the financial leverage Europe holds over the United States, challenging the assumption that the U.S. is an invincible financial superpower. The report, "Shorting America: Europe's financial leverage over the United States," released on June 23, 2026, quantifies the potential impact of Europe using existing regulatory tools to reduce demand for U.S. Treasuries .

The Core Asymmetry: Europe Owns Far More U.S. Assets

The study, authored by Filippos Petroulakis (Bank of Greece) and Farzad Saidi (University of Bonn, Kiel Institute & CEPR), identifies a $3.2 trillion asymmetry in transatlantic asset holdings as the foundation of Europe's potential financial leverage .

• Europe holds $9.6 trillion in U.S. assets.
• The U.S. holds $6.4 trillion in European assets.

This means Europe's exposure to the U.S. economy is roughly 1.5 times larger than the reverse, giving it a structural advantage .

The Regulatory Lever: Ending the Zero-Risk-Weight Privilege

The report focuses on a specific, existing regulatory lever: removing what it calls the "zero-risk-weight privilege" on U.S. Treasuries under two European regulatory frameworks :

• Solvency II: Governs insurers. The change would be implemented via the spread-risk charge.
• Capital Requirements Regulation (CRR): Governs banks. The change would be implemented via the risk weight.

The authors argue this privilege is "increasingly unjustified" on prudential grounds. U.S. debt-to-GDP is above 120%, and the U.S. has experienced a prior sovereign downgrade . The study frames the change not as a geopolitical weapon but as sound prudential policy that would treat U.S. Treasuries according to their actual credit metrics .

Estimated Impact: $200 Billion in Demand Withdrawn

Conservative estimates from the study imply approximately $200 billion in Treasury demand withdrawn over a decade from European insurers, banks, and pension funds. To put that in context, the authors note this is roughly a quarter of the Federal Reserve's first quantitative tightening (QT1) or a third of QE2 (the Fed's second round of quantitative easing) .

Impact on U.S. Borrowing Costs: $33–$42 Billion Per Year

The study estimates that this demand reduction would increase U.S. Treasury yields by 11–14 basis points. This translates into $33–$42 billion per year in added U.S. federal borrowing costs .

Two modeling approaches support this range :

• Linear scaling from the QT1 benchmark yields roughly 11 basis points.
• A granular demand-system model by Jansen, Li, and Schmid (2025) for a $100 billion permanent demand reduction at the long end yields roughly 14 basis points at the 10-year maturity.

Predicted Market Implications

• Self-reinforcing dynamics: Reallocating insurer capital toward European sovereign and bank bonds would improve European banks' funding structures, reducing their dollar dependence and relaxing constraints that might otherwise deter participation in Treasury divestment .
• Manageable transition: A large share of European dollar holdings is hedged. Partial unwinding of those hedges acts as a shock absorber, allowing dollar depreciation and yield increases to materialize gradually rather than disruptively .
• Replacement flows: Yield-seeking investors would likely step in to moderate, but not eliminate, the structural shift in demand .

Caveats: A Last-Resort Lever

The study presents this potential action with important caveats :

• The authors frame it as a last-resort lever to inform discussions of European strategic autonomy, not a recommended first move.
• The change is presented as sound prudential policy regardless of geopolitical context, correcting a regulatory distortion that is hard to defend given U.S. fiscal metrics.