Prof. Dr. Jan Viebig, Chief Investment Officer, ODDO BHF SE.

Against the backdrop of Trump's economic policy, it will become increasingly difficult for the US to finance its government spending. International investors are noticeably more cautious about buying US government bonds – at a time when the US government's financing requirements are reaching new heights. This poses a particular challenge for global markets, especially for the US government bond market. However, the new situation could also offer opportunities for Europe. The ingredients with which US President Donald Trump has garnished the ‘One Big Beautiful Bill Act’ (OBBA) make for an explosive mixture: according to the Congressional Budget Office, the bill will increase the national debt by 2.3 trillion dollars. This is because the numerous benefits for taxpayers are offset only by limited spending cuts. The House of Representatives has already approved the bill. The Senate vote is still pending.

Trump's plans are scaring off international investors who have regarded American government bonds as a ‘safe haven’ for decades. This uncertainty comes at an inopportune moment. This year, government bonds worth 9.2 trillion dollars of the total 36 trillion dollars in government debt are due to mature. This means that Finance Minister Scott Bessent not only has to finance the high current deficit, but also find follow-up financing for a good quarter of the national debt in the short term. The maturing government bonds amount to roughly twice the government's revenue of around 5 trillion dollars.

No one operating in the capital markets seriously expects Bessent to fail in this task. The question is rather at what interest rate he will succeed. Initially, Stephen Miran, Trump's chairman of the Council of Economic Advisers, had presented ideas in a paper for his ‘Mar a Lago Accord’ that deeply unsettled international investors. Miran proposed nothing less than a compulsory exchange of interest-bearing US Treasuries held as reserves by foreign monetary authorities for non-interest-bearing bonds with a 100-year maturity. Now Congress could go further still with its revision of Section 899 of the Internal Revenue Code: The tax law amendment contained in the new budget package would allow the US government to impose an additional tax of up to 20 per cent on income earned by foreigners in the US (capital gains and business income) if the US government considers the tax treatment of US companies abroad to be unfair.

Such concepts do not make foreign investors feel welcome. In response to the observed decline in demand for Treasuries, the US government would be compelled to implement an increase in interest rates. However, a 0.1 percent increase in interest rates alone would add 9.2 billion dollars to the US interest burden each year on the amount due for refinancing. Given the rise in debt and interest rates, the US Treasury is already spending more on interest than on the entire military (see chart).

Graph: Development of US interest expenditure and defense expenditure 1990–2025

The financial bottleneck in the US cannot solely be blamed on Trump. Since 2020, government debt has risen by 13 trillion dollars. However, Trump is responsible for an economic policy that is allowing high government debt to rise further, despite the fact that budget consolidation should be the order of the day. The consequences can be seen in two parameters: First, the yield on ten-year US government bonds is currently around 4.46 per cent, which is high by long-term standards. This means that the US government is already paying more than the German government, for example. Ten-year German government bonds currently have an interest rate of 2.53 per cent. Furthermore, the external value of the dollar has fallen sharply this year. At the beginning of the year, the exchange rate was around 1.03 dollars per euro, but it has since lost around 10 per cent to a current level of around 1.14 dollars per euro. This decline is most notably at the expense of foreign investors who hold bonds or shares in US dollars.

Trump is questioning the United States' dominance in the global economy and the role of the dollar as the world's reserve currency. From a European perspective, the new situation could provide a political opportunity to strengthen the international significance of the euro. When the European Monetary Union was established in the 1990s, there were hopes that the euro would gain greater significance in the global economy than the German D-Mark. The importance of the US dollar as the world's reserve currency has been declining for years. According to the IMF, the dollar now accounts for only 57.3 per cent of global currency reserves.  The euro is in second place, with 20 per cent of the market share, with the Japanese yen a distant third, with approximately 5.8 percent. At the beginning of 2016, when the IMF time series began, 65.5 per cent of global currency reserves were still held in dollars and 19.6 per cent in euros. These figures show how much the importance of the American currency has declined in recent years.

However, IMF figures also show that the euro has so far benefited very little from the structural weakness of the dollar. In our view, one of the main reasons for this is that international investors in particular, see weaknesses in the political structure of the euro. With the signing of the Maastricht Treaty in 1993, Europe opted for a single currency and a common monetary policy. However, economic, fiscal and social policy remains largely in the hands of the member states. European integration therefore remains incomplete. An even closer political union could lead to greater stability on the ‘old continent’. Another important issue is the European capital markets union. Greater integration of capital markets could promote growth, investment and stability in the European Union in the long term. The European capital market has great potential. According to the European Central Bank, households in the eurozone had financial assets of 33.5 trillion euro at the end of 2024. Small and medium-sized enterprises (SMEs) often find it especially difficult to obtain capital through the banking system in Europe. A capital markets union could mobilise trillions of euros in risk capital for SMEs, promote the diversity of financing sources and strengthen the international role of the euro.