The only obstacle and most important to the issuance of Eurobonds that will finance the EU’s strategic autonomy is Germany. The only major country in the Eurozone with an “excellent” credit rating (AAA) refuses to accept joint borrowing and the issuance of the Eurobond.
To achieve the strategic autonomy of the Old Continent requires three strong pillars – military, economic and financial power – and a safe asset is a necessary condition for financial power.
This need for a Eurobond is based on three reasons
1. Necessity
Europe must accelerate the development of its strategic autonomy to manage the breakdown of the rules-based international world order. The standoff with the United States over Greenland and the growing doubts about the future of NATO make it clear that Europe cannot wait.
Europe cannot rely on US Treasuries, i.e. an asset denominated in a foreign currency, as the safe-haven pillar of its economy.
While strengthening military and economic power is a process that takes many years, strengthening the Eurobond market would have an immediate effect.
2. It presents itself as an opportunity
There is growing global demand for European assets as a diversification strategy away from US assets. Investors are looking to diversify their geopolitical risk, and Europe’s fragmented bond market cannot fully meet this demand for safe assets.
Despite Europe having a stronger fiscal position than the United States, with a lower debt-to-GDP ratio and a smaller deficit, government bonds rated AA or higher represent just under 50% of GDP in the European Union, compared to over 100% in the United States.
Eurobonds, backed by Europe’s stable rule of law and credible institutions, would boost the supply of European safe assets and offer an attractive alternative to US government bonds.
3. Institutional support
The ECB is now actively promoting the international role of the euro as a necessary condition for achieving monetary sovereignty, with initiatives such as the digital euro and repo mechanisms for central banks outside the eurozone.
As ECB Executive Board member Piero Cipollone has said, “if we lose control of our money, we lose control of our economic destiny.” And the euro cannot develop into a global international currency without a sufficient supply of safe assets to meet investor demand.
Replacing up to 25% of the debt in terms of GDP of each EU country
With the issuance of Eurobonds of 4.5 trillion euros, the proposal is to replace up to 25% of the GDP of each EU country’s debt with Eurobonds in the coming years. This can be achieved through a combination of two actions:
1. Exchanging existing national bonds for Eurobonds by buying back and refinancing national bonds maturing with Eurobonds.
The servicing of these Eurobonds would be based on a transfer of revenues from each member state, similar to the current contributions to the EU budget, enshrined in national legislation. At current interest rates, the required transfer would amount to around 1% of GDP.
This transfer to cover the interest on Eurobonds will replace the direct payment of interest on the national bonds that will have been withdrawn and, because the interest rates on Eurobonds will probably be lower, will constitute a net saving for the member states. Of course, for anyone who knows the bond market, the risk is being overestimated…
Eurobonds would have a double guarantee: the legal commitment of the European Union, as issuer, to service the debt and, in the background, the national political and legal commitment to transfer the necessary revenues.
The proposed instrument is the EU-Bonds and EU-Bills, which are already issued by the European Commission on behalf of the European Union, which already exist on a significant scale and have an established infrastructure in the repos and futures markets.
The stock of EU-Bonds and EU-Bills will approach €1 trillion in 2026, making it the fifth largest market after Germany, France, Italy and Spain. The size of this market will increase to €5.5 trillion.
The main disadvantage of this proposal for existing Eurobonds is that they are classified as supranational securities and not as government securities, which reduces their demand and is the main reason why they have a higher yield than German Bunds.
The legal classification as “supranational” instead of “government” reduces the demand for EU-Bonds and EU-Bills by up to 80% compared to corresponding government bonds.
This is solely due to the legal classification of supranational organizations as “quasi-governments” and is not related to the solvency of the bonds.
2. Refinancing the Pandemic Debt
In this regard, it is crucial that the European Union decides to refinance the EU-Bonds and EU-Bills issued to finance the post-pandemic recovery program NextGenerationEU (NGEU), conveying to the markets the image of a stable and predictable issuance policy.
By increasing their size and creating a predictable issuance program, EU-Bonds and EU-Bills will join the sovereign bond indices, significantly increasing their demand from global investors, reducing their yields and allowing them to acquire a negative beta in terms of risk.
A deep and liquid Eurobond market would also allow European banks to diversify their national risk and would support the development of a deep and liquid European corporate debt market, contributing to the development of the savings and investment union and reducing the cost of public and private financing for all countries.
Why wouldn’t Eurobonds create a moral hazard problem?
Concerns have been expressed about three ways in which moral hazard could arise, but none of them seem convincing to us.
1. First concern
There is no explicit debt restructuring mechanism for national governments and therefore national governments would have an incentive to hide behind the security of Eurobonds and pursue irresponsible fiscal policies.
However, this risk is not considered to apply, as Eurobonds would only cover debt up to 25% of GDP, leaving countries responsible for most of their debt financing and providing incentives for disciplined fiscal policies.
It is also noted that the only example of large-scale financing through Eurobonds that we have, namely the post-pandemic NGEU program, did not lead to irresponsible fiscal policies in its main beneficiaries, Spain and Italy.
2. Second concern
By creating a safe alternative to national bonds, member states will gain an incentive to push for increased issuance of Eurobonds beyond 25% of GDP and for excessive support of national bonds by the ECB in times of crisis.
However, this scenario is unrealistic within the current European institutional framework. This concern can be addressed through explicit European legislation that would limit the issuance of Eurobonds to 25% of GDP, unless there is a unanimous decision to change the limit.
Regarding ECB support, while we would expect both Eurobonds and national bonds to be part of its structural portfolio, there are clear ECB guidelines on the conduct of asset purchase programmes, which rule out unjustified excessive support.
3. Third concern
Countries may, in times of crisis, default on the revenue contribution that supports Eurobonds.
While this is always theoretically possible, we consider it highly unlikely, as defaulting on these contributions would effectively amount to a political default towards the European Union.
Furthermore, there is no history of defaults on bonds issued by supranational organisations, nor a history of defaults on member states’ contributions to the European Union – even at the height of the euro crisis all countries continued to support the EU budget – and the UK, when it left the EU, paid off all its outstanding financial obligations.
Would Eurobonds mean that national bonds would become more subordinated and riskier? No, at least not in the sense of CDS (Credit Default Swaps or risk premiums).
There could be a “waterfall” that would set priority for payments, but a legally enshrined separation of national revenue sources could be sufficient: a part of national revenues supports national bonds and another part supports Eurobonds.
Furthermore, by reducing the risk that member states will lose their access to markets completely due to self-fueled crises of confidence, Eurobonds will also reduce the risk of a “doom loop” in national bonds, making them structurally safer.
The “doom loop” in national bonds is a vicious cycle where: -a country’s banks hold a lot of government bonds of the same country -the state begins to be considered financially precarious -the value of the bonds falls -the banks suffer losses -the state may have to bail out the banks -so government debt increases even more -the markets fear the state more -the bonds fall even more. (This pattern also applies to the Greek case).
Would Eurobonds function as safe assets?
There is not yet enough history on EU-Bonds and EU-Bills to assess their behavior under stress. Their size remains small, their future issuance is uncertain, and they are not included in government bond indices — factors that increase liquidity premiums and significantly limit their investor base.
Although the spread of EU-Bonds over German Bunds has widened in times of stress in recent years, this increase was due to their supranational nature and, importantly, occurred while yields on German Bunds and US Treasuries were also rising.
In other words, all bonds have recently behaved as riskier assets due to the inflationary nature of recent shocks.
Today, the spread of EU-Bonds over German Bunds is similar to the spread of Spanish bonds over Bunds — that is, EU-Bonds, although rated AAA but classified as supranational securities, have a spread similar to A-rated government bonds.
This suggests that the problem with EU-Bonds today is related to liquidity and classification, not solvency.
Will national bond yields rise?
Marginal yields are likely to rise while average yields are likely to fall.
It is true that the introduction of safe Eurobonds means that the default risk will affect a smaller volume of national bonds, thus increasing their relative risk. In bonds, “marginal yields” usually mean: how much extra profit/return an investor gets when taking on a little more risk or buying more debt.
This could therefore lead to a rise in national bond spreads — a Modigliani-Miller-type proposition. To the extent that governments are marginally financed through national bonds, marginal returns may indeed rise.
However, average yields on government debt — including both national debt and, indirectly, their share of Eurobonds — are likely to fall.
But the assumption may turn out to be wrong: as the overall European financial system becomes safer, even national bond yields may eventually fall.
Will Eurobonds yield lower than Bund yields?
To the extent that they are treated as government securities, are considered safe, and benefit from a deeper and more liquid market, they should trade at lower yields than Bunds.
Realistically, however, as with any new asset, it may take time for investors to absorb and trust them. So it may take some time for Eurobond yields to become lower than Bunds. But that will probably happen eventually.
Why is both an exchange of existing debt and a replacement of maturing bonds being proposed?
Because if only maturing bonds were refinanced, it would take too long to reach the 25% of GDP target, and there would be less control over the composition along the yield curve, since this would depend on the maturity schedule.
The two approaches are not mutually exclusive, however. It should be noted that there would be no pari passu issue in the exchange process, as no real exchange is proposed but two simultaneous transactions: either the European Union or the national debt management agencies would repurchase national bonds, and the European Union would issue EU-Bonds and EU-Bills of equal value.
The Spanish government has proposed a variation of the above proposal based initially only on flows: over the next five years, one third of maturing bonds would be refinanced, as well as new debt issuance related to future deficits compatible with EU fiscal rules.
Countries that violate EU fiscal rules would not be able to finance part of the deficit. According to Spanish calculations, this would create a stock of Eurobonds of around €5 trillion within five years (statements by Carlos Cuerpo Caballero at a PIIE event, 16 April 2026).
Can countries with low debt-to-GDP ratios participate?
Yes. The proposal is presented in the spirit of “pragmatic federalism” recently advocated by former Italian Prime Minister Mario Draghi: each member state can decide how much of its debt — up to 25% of GDP — it wants to finance through Eurobonds. This would make it easier for member states with low debt-to-GDP ratios and ensure that each national bond market remains deep and liquid.
What would be the ECB’s role?
Beyond the issue of portfolio composition, it is crucial that the ECB includes Eurobonds in the list of eligible securities for its asset purchase programmes and its structural portfolio, in order to avoid artificial differences between Eurobonds and national bonds.
Why would so-called “prudent” countries such as Germany agree to this proposal?
Because it makes the European economy more stable and, therefore, improves Germany’s financing costs and economic prospects.
Bundesbank President Joachim Nagel seems to agree, acknowledging “the benefits of creating a common European, highly liquid, pan-European safe benchmark” and that “action is needed.” Moreover, given that, under current German fiscal plans, the debt-to-GDP ratio is projected to rise to at least 80% over the next decade, financing part of it through Eurobonds would allow Germany to keep the national Bund market below 60% of GDP.
Aiming to reduce financing costs
The bottom line is this: European fragmentation severely limits Europe’s economic and geopolitical potential. European leaders have agreed to de-fragment the single market to boost market size and to de-fragment investment to boost productivity. The above proposal complements these actions by de-fragmenting the government bond market to reduce financing costs.
European leaders must make it clear: if they choose not to strengthen the Eurobond market, they are choosing higher financing costs, lower potential growth and weaker strategic autonomy.
This plan combines three goals of the Brussels “deep state” – gaining a greater say in the fiscal situation of states with additional guarantees and negating economic sovereignty in order to direct investments in a war-like direction.
