Greenland’s geopolitical storm What may be next for allies, markets, and investors

January is turning out to be anything but quiet on the geopolitical front. First came the raid on Venezuela, followed by protests in Iran and renewed concerns about US intervention. Now, a diplomatic crisis over Greenland has erupted, and we’re only two-thirds of the way through the month.

Tariffs, déjà vu?

Yes, trade wars and tariffs are so 2025—but US-Europe tensions over Greenland are spilling over into real world trade. Eight European countries—including two non-EU members, the UK and Norway—are suddenly staring at a new tariff regime: a 10% additional tariff starting February 1 rising to 25% on June 1 unless Denmark agrees to a sale before then.

Markets wobbled on the news, with US and European equities slipping, and both US Treasury yields and gold edging higher. Still, the market reaction has been mild so far, raising the real question: are tariffs really coming imminently? We don’t think so—at least not immediately.

The timeline is simply too tight for any meaningful deal to be negotiated by February 1, making it far more likely that this is a tactic to force negotiations. President Trump is meeting with European leaders at Davos this week, but that’s almost certainly the opening move in the negotiations, not the finale. Any concessions are likely to come in the form of extended deadlines, and not on the tariffs themselves. And looming over all this is the legal question of whether the International Emergency Economic Powers Act can even be lawfully used as the basis for imposing geopolitically motivated tariffs.

What is the real US goal?

Think of Greenland not as a land grab, but as an attempt to renegotiate the terms of an alliance. The US argument—that Denmark and Europe cannot independently defend Greenland—is largely correct but also somewhat beside the point. The US already provides decisive security via NATO coordination, local base infrastructure, and early warning capabilities. What Washington is really after is more control: faster decision-making, fewer political constraints, and veto power in an Arctic region it now sees as a strategic frontline. Defense capacity is the justification; operational autonomy is the goal.

The strategic logic is clear: Russia’s expanding militarization of the Arctic, China’s increasing interest in seeking access, and NATO’s consensus frictions. Danish sovereignty—or Greenland’s self-rule—creates political constraints the US wants eased. This doesn’t necessarily mean annexation is the optimal solution, as that would come with legal, social, and alliance-level downsides. Instead, Washington would likely accept several alternatives short of outright “ownership,” as long as Denmark (and Europe) ultimately concedes broader US economic and military prerogatives.

What scenarios are likely?

Scenario 1: A renegotiated status—not annexation (80% probability)

Negotiations between mismatched powers are never pretty, but they are a geopolitical reality here. Europe may have economic leverage, but the US-European relationship is geopolitically unbalanced because Europe relies heavily on US security guarantees, especially amid the ongoing war in Ukraine.

The US also has a structural advantage: one powerful executive branch leading a unified state versus a patchwork of EU and non-EU states working to overcome coordination challenges. Taken together, in our view, these factors make it likely that some redefined status for Greenland emerges in 2026-2027. The most probable outcome, we believe, is one that nominally preserves Danish sovereignty—perhaps with a slimmer chance Greenland gains independence)—but cedes significant economic and military authority to the US.

Scenario 2: Status quo (10-15% probability)

This seems hard to imagine given how aggressively the US President has elevated the issue. Still, 2026 could generate enough competing crises requiring global attention to push Greenland temporarily out of the spotlight. Europe’s underappreciated advantage here is time: the longer negotiations drag on, the greater the chance that other priorities rise to the top—for example, progress on Cuba or Iran. And while the isolationist foreign policy wing of MAGA shapes much of the rhetoric, the vast majority of Trump 2.0 foreign policy decisions have enjoyed the imprimatur of realists, who also happen to be trans-Atlanticists. Any durable shift in Greenland’s status requires their involvement, and they do not see alliance discord as strategically useful in strengthening America’s position in the world.

Scenario 3: Outright annexation—low but not zero (5-10%)

This is a very low probability, though not impossible, scenario. Annexation carries clear downsides: legal complexity, social and governance costs, and a near-guaranteed rupture in trans-Atlantic relations. From Europe’s perspective, it would be catastrophic, effectively dismantling even the facade of collective security. Both sides have strong incentives to avoid this outcome, but it remains a risk if negotiations accidentally veer into miscalculation and someone crosses a red line that becomes difficult to unwind.

The risk of a rough ride

While we’re confident about the ultimate direction of travel, we’re less confident that we will get there without damage. The risk of miscalculation feels higher than during last year’s trade talks, despite the similarities. The US president is emboldened by a string of foreign policy wins and is increasingly mindful of his legacy—and territorial expansion would be a dramatic one.

Trump’s success in extracting concessions from Europe last year may encourage him to press for another favorable deal. But European attitudes have hardened too. Running down the clock on Trump and his administration will remain Europe’s go-to strategy, yet pressure is growing to avoid anything that looks like appeasement. All together, it creates real potential to stumble into a trade war.

In such a trade war, financial markets may not just absorb damage—they could become Europe’s primary weapon. Europe collectively owns nearly $20 trillion in US financial assets, so sizable capital reallocation would move markets (Figure 1). The White Houses closely watches US market performance, factoring it into its decision-making calculus. Consumer confidence and spending buoy the US economy, much of it on the back of the wealth effect from high stock market returns. As a result, targeting US financial markets may well be the EU’s most potent form of leverage.

Another pathway would be the idea behind the “anti-coercion” tool under consideration in Brussels, which could hit US services exports and intellectual property—in other words, the earnings engine that drives US stock market strength.

What it means for markets and investors

• Gold: The market’s reaction has been negative but relatively muted so far. Looking ahead, any escalation in tensions would naturally support gold given its role as the go-to haven for geopolitical risks
• EURUSD: More counter-intuitively, escalating tensions could also be positive for EURUSD. A “sell America” signal from Europe, combined with already low hedge ratios among European investors and the US dollar’s (USD’s) sensitivity to shifts in global equity sentiment—creates room for near-term Euro strength
• European bonds: Rising tensions would also likely push long-term European bond yields higher as larger fiscal deficits would need to be priced in, implying steeper curves for most European government bonds
• European equity market: Escalation would be broadly bearish for European exporters, especially those heavily exposed to US demand, which constitutes a large share of Europe’s equity market. Notably, as an exception, rising tensions would be a positive signal for European defense stocks, which stand to benefit from any widening trans-Atlantic rift and the associated rise in fiscal spending
• Global equities: And if the EU activates its anti-coercion instrument, signaling willingness to expand the trade war beyond the goods trade, that would be strong bearish signal for global equities across the board
  

The most likely outcome to all this, in our view, is a negotiated reset that expands US influence without breaking formal sovereignty. But the path to get there will be a bumpy one, and it’s fraught with real geopolitical and market risk. Missteps are possible, and the growing use of financial markets as leverage suggests the next moves will matter well beyond the Arctic.

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