Whether intended as provocation, leverage, or strategic signaling, the U.S. threat to “take over” Greenland captured something unsettling about the current phase of American power: An increasingly transactional approach to security, territory, and alliances. It also crystallized a reality that has been building for years: The U.S. is no longer prepared to guarantee security unconditionally and for free.

For Europe, and for the world’s middle powers, the message is clear: The post-Cold War international order with its security bargain “no longer exists,’’ to use the words of German Chancellor Friedrich Merz at the Munich Security Conference this month. This raises a stark question: What does it mean for Europe to assume primary responsibility for its own security? Decision-making that once took years has accelerated into months. Red lines around fiscal rules, joint borrowing at the European Union level, and defense integration have blurred. What is emerging is not a single policy shift, but a set of agreements that amount to a reordering of Europe’s institutional, security, fiscal, and financial architecture.

As countries rush to finance defense spending and build resilience, the fiscal and financial consequences are only beginning to surface. Long-term sovereign yields in advanced economies—from Germany to Japan—are rising to levels last seen decades ago. The risk for the US is that such dynamics will act as a gravitational pull for domestic long-term yields at a time when the Trump Administration is focused on lowering borrowing costs for households to address an affordability crisis.

Europe’s Rearmament Needs to Go Big and Move Fast

If Europe is serious about strategic autonomy, the numbers are daunting. Moving from reliance on US defense to a more self-sufficient position requires significant increases in military spending, joint procurement, intelligence capabilities, and logistics. At the policy level, several landmark decisions have either been agreed to or are moving rapidly toward implementation.

First, the creation of a €150 billion SAFE (Security Action for Europe) facility provides centralized funding for defense spending. This is complemented by a capital increase and mandate shift at the European Investment Bank (EIB), enabling it to deploy up to €150 billion specifically toward EU defense supply chains. Long focused on green and infrastructure financing, the EIB is now explicitly part of Europe’s security apparatus.

Second, national governments are being given fiscal flexibility. Through the Maastricht escape clause, countries can increase defense spending by up to 1.5% of GDP per year, amounting to as much as €500 billion in aggregate. This is reinforced by a NATO commitment to 3.5% of GDP for defense spending.

Third, the European Stability Mechanism (ESM) could be repurposed to defense. Once synonymous with crisis conditionality, the ESM is being reframed as a backstop for collective security investment.

Finally, there is urgency around supply-side reforms, notably the Savings and Investment Union (SIU), to ensure Europe can mobilize private capital at scale rather than relying entirely on public funding. Taken together, these moves represent a decisive break from Europe’s debt orthodoxy.

The Birth of a Trillion-Euro Market

The fiscal consequences are enormous. Combining new defense-related issuance with existing joint borrowing programs, Europe is on track to establish a Eurobond market exceeding €1 trillion. This includes approximately €650 billion from the coronavirus era, €95 billion for Ukraine, and several hundred billion euros from new defense facilities and national borrowing enabled by fiscal exemptions.

This represents a debt shock second only to the pandemic. The crucial difference, however, lies in monetary policy. The overall policy stance of the ECB is not as accommodative. Importantly, there is no pandemic-style QE putting downward pressure on sovereign yields or compressing spreads.

Joint issuance is no longer just a political aspiration: It is a market necessity. Europe is being pushed—by geopolitics rather than ideology—toward the equivalent of a federal debt market.

Middle Powers and the “Carney Moment”

This shift is not occurring in isolation. As Mark Carney argued in his recent Davos speech, the world is moving toward a system where middle powers must actively choose how they anchor themselves—strategically, financially, and institutionally. The old model of free US security and dollar dominance is no longer viable. Defense is one of Carney’s four pillars of sovereignty, along with food, energy and finance.

Autonomy requires fiscal balance sheets. Europe is moving toward internalizing security costs and building fiscal capacity. Others, from Canada to parts of Asia, face similar decisions.

Global Interest Rates: The Spillovers Begin

The market implications extend beyond Europe. Across advanced economies, fiscal spending on defense and sovereign debt issuance are rising simultaneously. Long-term yields in Japan have surged to levels last seen in the late 1990s. Ten-year German bund yields are approaching 3%, even as market participants expect the ECB to lower short-term rates. The result is a sharp curve steepening, driven by a repricing of term-premia.

This has not only market structure consequences within Europe but also cross-border implications. A deep, liquid Eurobond market could compete directly with US Treasuries for global capital if institutional investors were to perceive such market as a viable alternative at scale.

The United States: The Risk of an Uncomfortable Feedback Loop

For the US, timing could be challenging. The US fiscal outlook has been deteriorating for years, and about $10 trillion of government debt is coming due this year. As the midterm elections approach, the Trump administration is focused on affordability and is exploring unconventional means to keep borrowing costs down—such as credit card rate caps or preventing institutional investors from purchasing single-family homes.

As Europe and other advanced economy countries issue more sovereign debt, global term premia are set to rise. Increasing competition for global savings could put upward pressure on Treasury long-term yields.

In that sense, the Greenland episode may prove emblematic. A strategic posture designed to reduce American burdens may, through financial channels, end up raising them. And Europe, if it rises to the challenge, may end up with a deeper bond market and more integrated capital markets.

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A version of this blog first appeared on MarketWatch.