Financial markets were spooked on Monday after US president Donald Trump turned his ire once again on the chair of the US Federal reserve, Jerome Powell, in the latest upending of standards in US public and political life. One of the consequences may well be that he makes the eurozone an increasingly attractive destination for cash.
Trump said on his Truth Social platform that there was “virtually no inflation”.
He added that “With these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late [Powell], a major loser, lowers interest rates, NOW”.
This attack on the Fed, which is independent from government, sent those markets that were open into a tailspin. The S&P 500 fell more than 2%, and gold, long seen as the king of defensive assets, hit $3,500 an ounce for the first time.
After Trump announced widespread tariffs on April 2, which were widely derided as being economically unsound and damaging for the US, the idea that he might use political means to oust Powell for a central banker more willing to bend to his demands is no longer unthinkable.
Big, liquid, unstable
This will be damage the US's status in the financial world. Investors like the US market because it is big, liquid and stable.
With Trump’s sustained attack on Powell — he said Powell wasn’t up to the job earlier this month and has also said on Truth Social that the central banker’s “termination cannot come fast enough!” — the stability of US markets is justifiably under question.
When stability erodes, investors start looking elsewhere. A crude demonstration of this can be seen in the yield of 10 year US Treasuries, which rose from 4.335% to 4.434% on Monday and up from 4.117% at the start of April. They rose by the most they have in more than two decades during the week tariffs were first announced.
Calm, boring Europe
This is where the eurozone could be the winner as Trump trashes the US's economic and financial reputation in the name of improving its performance.
The Bund market is the closest eurozone equivalent to Treasuries. It is however, a much smaller market. There were roughly €1.8tr of federal bonds outstanding at the end of 2024, according to the German Finance Agency — this figure excludes bills. That compares with $22.4tr of US public debt, ex-bills, as of the end of March, according to the US Treasury. Meanwhile, the eurozone's jumbo joint issuer, the European Union, had €0.6tr of bonds outstanding as of April 15.
This is vast difference in market size is undeniably a black mark for investors looking for somewhere big and liquid to trade.
But with Europe distancing itself from its US, Germany releasing its debt break and planning hundreds of billions of new infrastructure and defence spending, and others expected to follow suit, the European government bond market looks like it will grow exponentially over the next 10 years.
This increased size and liquidity and the relative scarcity of paper should be a positive for refugees from the US Treasury market. Add to that the stability inadvertently provided by famously slow moving EU bureaucratic processes, and the eurozone looks an increasingly attractive place to park money safely.
The euro has a way to go before it replaces the dollar as the world's reserve currency. Its bond markets must grow by some vast measure to match the US equivalent as a pool of liquidity too, not to mention the many national variations preventing the dream of an EU Capital Markets Union from becoming reality.
But as the late US senator Everett Dirksen reportedly quipped when he deemed federal spending to be out of control “a billion here, a billion there, and pretty soon you’re talking real money”.