Highlights

• Europe's defense buildup is driving institutional architecture including SAFE's €150B in EU bonds, pushing the bloc toward a federal debt market that could challenge U.S. Treasury dominance at the margin.
• Modern military systems require mineral-intensive supply chains—magnets, electronics, specialty alloys—forcing Europe to finance mine-to-magnet ecosystems while China controls 90%+ of rare-earth refining.
• Under Great Powers Era 2.0, sovereignty rests on balance sheets and critical minerals: the bloc financing strategic industrial capacity at scale gains geopolitical optionality in a contested world order.

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The core thesis in the February 2026 MarketWatch opinion by Mark Bathgate and Fabio Natalucci is structurally sound: Europe is not reacting to a one-off shock but to a perceived shift in the transatlantic security bargain. Under Donald Trump, U.S. security guarantees appear more transactional. The Greenland episode—explicitly tied to strategic geography and mineral endowment—accelerated this perception across European capitals.

German Chancellor Friedrich Merz described the post-war order as effectively over. Meanwhile, Canadian Prime Minister Mark Carney framed the moment at Davos as a “rupture,” arguing sovereignty now rests on energy, food, finance, and critical minerals.

This aligns closely with Rare Earth Exchanges’™ “Great Powers Era 2.0” thesis: security, industrial capacity, and sovereign balance sheets are converging.

The European Defense-Finance Stack

Europe’s defense ramp is not just about higher budgets. It is institutional architecture.

Key pillars include:

• SAFE (Security Action for Europe) – up to €150 billion in EU-level loans funded via EU bond issuance.
• Fiscal escape clauses allowing temporary defense-spending flexibility.
• Expanded defense-adjacent financing from the European Investment Bank.
• Possible deployment of the European Stability Mechanism lending capacity.
• Continued joint issuance under the European Commission’s funding plans.

The EU already carries roughly €700+ billion in joint debt. With SAFE and defense-linked issuance layered on top, surpassing €1 trillion in common bonds over time is plausible. This is the crux of the “Eurobond powerhouse” hypothesis: Europe is being pushed—by geopolitics rather than ideology—toward something approximating a federal debt market.

The nuance: scale alone does not create a safe asset. Liquidity, repo infrastructure, integration, and political cohesion matter just as much. Europe is still mid-construction, and lots of ideological and bureaucratic baggage could hinder speed.

Rearmament Is a Minerals Story

Defense expansion is mineral-intensive. Modern military systems are magnet-heavy, electronics-dense, and reliant on specialty alloys. The EU’s Critical Raw Materials Act explicitly identifies aerospace and defense as strategic sectors and sets 2030 benchmarks: 10% extraction, 40% processing, 25% recycling, and dependency caps of 65% per third country.

The constraint is real. The International Energy Agency estimates China controls roughly 60% of rare-earth mining, over 90% of refining, and the overwhelming majority of magnet production capacity. Defense demand is not the largest by volume—EVs and energy dominate—but it is strategically inelastic.

Thus Europe’s defense borrowing is also industrial borrowing: magnet plants, refining capacity, processing hubs, and stockpiles require long-duration capital. That reinforces the case for a deeper euro safe-asset market.

Great Powers Era 2.0: Balance Sheets as Weapons

In this emerging order:

• China controls chokepoints and the vast majority of manufacturing compared to other nations/regions.
• Europe is building fiscal-industrial capacity.
• Japan maintains state-backed mineral resilience.
• India and Brazil pursue bilateral mineral security.
• The United States pushes allied reshoring while managing its own fiscal strain—a key nexus of the unfolding new order.

This is not just a minerals race. It is a balance-sheet race.

The bloc that can finance mine-to-magnet ecosystems at scale gains strategic optionality.

Does This Threaten U.S. Treasurys?

The U.S. Treasury market (~$30 trillion outstanding) remains vastly larger than the EU joint issuance. There is no immediate displacement risk anytime soon.

However, three margin effects matter:

1. Term premia pressure.

If Europe and other advanced economies simultaneously increase long-duration sovereign issuance, global term premia can rise. Even small persistent increases affect U.S. borrowing costs, given large refinancing volumes.

2. Safe-asset substitution at the margin.

If EU bonds achieve scale, liquidity, and integration, reserve managers and institutional investors may incrementally diversify.

3. Industrial competition.

SAFE’s procurement localization requirements reduce reliance on external suppliers. Over time, this could shift defense-industrial gravity toward Europe and intensify competition for scarce critical inputs.

The likely outcome is not displacement of Treasurys, but a more contested “exorbitant privilege.”

Bottom Line

Europe’s defense buildup is not merely a fiscal event. It is a structural reordering of security, capital markets, and mineral supply chains. Under the Great Powers Era 2.0 premise proposed by Rare Earth Exchanges, sovereignty is built on magnet supply chains as much as missiles—and on balance sheets as much as battle plans.

The United States remains dominant. And in a world where Europe is forced to internalize security costs and finance mineral-intensive rearmament, the gravitational field around global capital is shifting—subtly, structurally, and perhaps durably in the decade to come.