We argued last year that it was time to create a deep, large, and liquid market for Eurobonds (Blanchard and Ubide 2025). Since then, there has been growing support for the initiative, not just from think tanks and academics (Hildebrand, Rey, and Schularick 2025) but notably from the European Central Bank (ECB) (Lane 2026), the Bundesbank (Nagel, Politico, February 2026), and some EU governments (Cuerpo, in the Financial Times, February 2026, and at PIIE event).
In this update, we discuss why the urgency to issue Eurobonds in large quantities has grown, clarify our proposal, and address the main questions and criticism that we have received.
The urgency to create a deep, large, and liquid market for Eurobonds has increased
This urgency reflects three reasons.
First, the need: Europe must accelerate the development of strategic autonomy to manage the rupture of the international rules–based global order. The row with the United States over Greenland and the growing doubts about the future of the North Atlantic Treaty Organization (NATO) make clear that Europe cannot wait. Strategic autonomy requires three pillars—military, economic, and financial strength—and a safe asset is a necessary condition for financial strength. Europe cannot rely on US Treasuries, an asset denominated in a foreign currency, as the safe-asset pillar of its economy. While boosting its military and economic strength is a multi-year process, boosting the Eurobond market would have an immediate effect.
Second, the opportunity: There is a growing global demand for European assets as a diversification strategy away from US assets. Investors want to diversify their geopolitical risk, and Europe's fragmented bond market cannot fully address that demand for safe assets: Despite having a sounder fiscal position than the United States, with a lower debt-to-GDP ratio and smaller deficit, outstanding sovereign bonds with an AA rating or higher amount to a bit below 50 percent of GDP in the European Union, versus over 100 percent in the United States. Eurobonds, supported by Europe's stable rule of law and reliable institutions, would boost the supply of European safe assets and offer an attractive alternative to US Treasuries.
Third, the institutional support: The ECB is now actively promoting the international role of the euro as a necessary condition to achieving monetary sovereignty, with initiatives such as the digital euro and the repo facilities for non–euro area central banks. As ECB Executive Board member Piero Cipollone says, "If we lose control of our money, we lose control of our economic destiny." And the euro cannot become a global international currency without offering an ample supply of safe assets that meet investors demand.
Clarifying what we propose
Announce the replacement of up to 25 percent of GDP of each EU country's debt with Eurobonds over the next few years. This can be done with a combination of two operations: exchanging current national bonds by Eurobonds via buybacks and refinancing national bond maturities coming due with Eurobonds.
The servicing of these Eurobonds would be backed by a transfer of revenues of each member state, similar to the current transfers to the EU budget, enshrined in national legislations. At current interest rates, the transfer needed would amount to about 1 percent of GDP. This transfer to cover interest payments on Eurobonds would replace the direct payment of interest on the national bonds that have been retired and, because the interest rates on Eurobonds will likely be lower, would represent a net saving for member states. Eurobonds would enjoy a double guarantee: the European Union's legal commitment, as an issuer, to service the debt and, behind the scenes, the national political and legal commitment to transfer the revenues to service the debt.
We propose the Eurobond instrument to be the EU-Bonds and EU-Bills issued by the European Commission on behalf of the European Union, which already exist in size and benefit from an established infrastructure of repo and futures markets. The stock of EU-Bonds and EU-Bills will be close to €1 trillion in 2026, the fifth largest after that of Germany, France, Italy, and Spain. Under our proposal—which could also include consolidating the issuance by other EU supranational entities, like the European Stability Mechanism (ESM), into EU-Bonds and EU-Bills—the size of this market would increase to €5 trillion.
Our proposal would address the main shortcoming of existing Eurobonds: They are classified as supranationals, not as sovereigns,[1] which lowers their demand and is the main reason they have a yield higher than German Bunds. As Bonfanti (2025) suggests, the legal classification as supranational rather than sovereign reduces the demand for EU-Bonds and EU-Bills by as much as 80 percent versus for comparable sovereign bonds. This is purely driven by the legal classification of supranationals as "quasi-governments" and is not related to the solvency of the bonds. In this regard, it is paramount that the European Union decide to roll over the EU-Bonds and EU-Bills that were issued to finance the NextGenerationEU (NGEU) post-COVID-19 recovery program, conveying to markets a steady issuance outlook. By boosting their size and creating a predictable issuance program, we believe that if our proposal is adopted, EU-Bonds and EU-Bills would be included into sovereign indices, and would significantly increase their demand among global investors, reducing their yields and allowing them to achieve a negative beta to risk .
A deep and liquid Eurobonds market would also allow European banks to diversify their national risk and support the development of a deep and liquid European corporate debt market, contributing to the growth of the savings and investment union and lowering public and private funding costs for all countries.
Clarifying what we do not propose
We do not propose Eurobonds as a way for some countries to boost debt and spending, circumventing their apparent lack of fiscal space. We do not propose any new spending program: We only propose replacing some proportion of national bonds with Eurobonds, without increasing the total stock of EU debt.
We do not propose to earmark these Eurobonds for any specific spending program. Our proposal is about optimizing debt management, not about choosing spending priorities. This is, after all, how national budgets work: The spending decisions are separate from the funding decisions. Indeed, by delinking the issuance of Eurobonds from new spending programs, we remove one of the motivations to increase deficits. Of course, if in the future EU leaders decide to launch new spending programs, including EU public goods, they could be funded by Eurobonds if so agreed.
We do not propose new taxes to fund these Eurobonds. We do not propose to increase spending, and therefore we do not require new taxes. The support for the Eurobonds would come from transfers of existing national revenues to the European Union, similar to the existing EU-Bonds and EU-bills.
Our proposal is sometimes interpreted as similar to the old blue/red proposal (Delpla and von Weizsäcker 2010) of "safer" blue bonds versus "riskier" red bonds. It is not, with two fundamental differences. First, we propose that national bonds remain a much larger share of national debt than Eurobonds, to ensure liquidity of national bonds and avoid moral hazard. Second, we do not propose creating new Eurobonds with a joint and several (collective and individual) guarantee. Instead, we propose to create Eurobonds that can be treated as sovereign, issued by the European Union.
Addressing feedback and criticisms: FAQs
Would Eurobonds create moral hazard? We don't think so.
Concerns have arisen over three ways moral hazard could occur, none of which we think are convincing.
First concern: that there is no explicit debt restructuring mechanism for national bonds—as in the blue/red proposal—and thus national governments would have an incentive to hide behind the safety of Eurobonds and engage in irresponsible fiscal policies
We don't think this applies to our proposal, as Eurobonds would only cover debt up to 25 percent of GDP—while in Delpla and von Weizsäcker (2010) the blue/red proposal Eurobonds covered debt of 60 percent of GDP—leaving countries responsible for the majority of their debt financing and providing incentives for disciplined fiscal policies. We also note that the one observation we have of large-scale Eurobonds financing, the post-COVID-19 NGEU program, has not led to irresponsible fiscal policies in its main beneficiaries, Spain and Italy.
Second concern: that by creating a safe alternative to national bonds, member states will have the incentive to press for growing issuance of Eurobonds beyond 25 percent GDP and for excessive ECB support for national bonds in times of stress
We find this unrealistic under the current European institutional framework. This concern can be addressed by explicit EU legislation that limits Eurobond issuance to 25 percent of GDP absent a unanimous decision to change it. As far as ECB support is concerned, while we would expect both Eurobonds and national bonds to be part of the ECB's structural portfolio, there are clear ECB guidelines about the conduct of asset purchase programs that rule out unwarranted excessive support.
Third concern: that countries may, in times of stress, default on their contribution of revenues to support the Eurobonds
While always a possibility, we think this is very unlikely because defaulting on the contributions would be akin to a political default on the European Union. In addition, there is no history of default on bonds issued by supranational institutions, no history of default in the member state contributions to the European Union—even at the height of the euro crisis all countries continued to support the EU budget—and that when the United Kingdom exited the European Union, it paid all its outstanding bills.
Will Eurobonds imply that national bonds become junior and at risk? Not in a credit default swap (CDS) sense.
There is no waterfall in our proposal that sets a priority of payments, just a separation of national revenue pools: One part of national revenue supports national bonds; another part, Eurobonds. Furthermore, by reducing the risk of member states completely losing market access in case of self-fulfilling runs, Eurobonds would also reduce the doom-loop risk in national bonds, making them structurally safer.
Would Eurobonds behave as safe assets? We think so.
There is not enough history of EU-Bonds and EU-Bills to assess their behavior under stress. As discussed above, their size is small, their future issuance is uncertain, and they are not included in sovereign indices, all of which add liquidity premia and severely limit their investor universe. While the spread of EU-Bonds versus German Bunds has increased in episodes of stress over the last couple of years, this increase has been driven by their supranational nature and, importantly, the increase has happened while German Bund yields and US Treasury yields also increased. In other words, all bonds have recently behaved as riskier assets because of the inflationary nature of the recent shocks.
At the moment the spread of EU-Bonds to German Bunds is similar to the spread of Spanish bonds to German Bunds—in other words, EU-Bonds rated AAA but classified as supranationals have a spread similar to sovereign bonds rated A, which suggest that EU-Bonds are currently hampered by liquidity and classification, not solvency. We would expect that if our proposal were adopted and EU-Bonds and EU-Bills are classified as sovereigns, their yields would be similar to—or lower than—German Bunds.
Will national yields increase? Marginal yields may; average yields will likely decline.
It is true that the introduction of safe Eurobonds implies that default risk falls on a smaller volume of national bonds, increasing their risk. Thus, ceteris paribus, this may lead to an increase in the spread on national bonds—a Modigliani-Miller like proposition.
To the extent that governments finance themselves at the margin through national bonds, marginal yields may therefore go up. Average yields on government debt—including both national debt and, indirectly, their share of Eurobonds—should come down, however.
But the ceteris paribus assumption may be wrong: To the extent that the overall European financial system is more secure, even yields on national bonds may end up lower.
Will rates on Eurobonds be lower than Bund yields? To the extent that they are treated as sovereign, are perceived as 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 some time for investors to absorb and trust them. Thus, it may take some time for yields on Eurobonds to become lower than Bund yields. But it should eventually happen.
Why do we propose both exchanging current stocks and replacing bonds that mature?
Because by only refinancing maturities coming due, it would take too long to reach our 25 percent of GDP target, and there would be less control of the composition across the yield curve because it would depend on the schedule of maturities coming due. The two approaches are not exclusive, however.
Note that there would be no pari-passu concern in the exchange process, as we do not propose an actual exchange but rather two simultaneous transactions: Either the European Union or the national debt management offices would buy back national bonds, and the European Union would issue EU-Bonds and EU-Bills for the same amount.
The Spanish government has made a variant of our proposal based, initially, only on flows: Over the next five years, refinance one-third of maturities coming due, plus the new debt issuance related to the future deficits consistent with EU fiscal rules. Countries breaching the EU fiscal rules would not be able to finance the deficit part. According to Spain's calculations, this would create a stock of Eurobonds of about €5 trillion in five years (remarks by First Vice President Carlos Cuerpo Caballero of Spain at a PIIE event, April 16, 2026).
Can countries with low debt relative to GDP participate? Yes.
Our proposal is flexible, in the spirit of the "pragmatic federalism" recently advocated by former Prime Minister Mario Draghi of Italy: Each member state can decide how much of its debt, up to 25 percent of GDP, that it wants financed by Eurobonds. This would accommodate member states with a low debt-to-GDP ratio and ensure that each national bond market remains deep and liquid.
What would be the role of the ECB?
The ECB is free to choose the composition of its structural portfolio. It makes no difference to the feasibility of our proposal whether the ECB decides to exchange some or all of its current holdings of national bonds for Eurobonds. The larger the portion it exchanges and keeps on its balance sheet, however, the lower the volume potentially transacted in the market, thus the smaller the effective market, and the smaller its liquidity.
Leaving aside the issue of portfolio composition, it is critical that the ECB includes Eurobonds in the list of eligible bonds for its asset purchases programs and for its structural portfolio, to avoid creating artificial differences between Eurobonds and national bonds.
Why would the so-called frugal countries, such as Germany, agree to this proposal?
Because it makes the European economy more stable and, as such, improves Germany's funding costs and economic prospects. Bundesbank president Joachim Nagel seems to agree, as he sees "the benefits of creating a common European, highly liquid, euro-wide benchmark safe asset" and that "action is necessary." Furthermore, considering that, under current German fiscal plans, its debt-to-GDP ratio is projected to increase to at least 80 percent of GDP over the next decade, financing a share of it with Eurobonds would allow it to keep its national Bund market under 60 percent of GDP.
What about the other existing supranational bonds issued by other EU institutions?
Our proposal is about optimizing debt management and, as such, it is critical to build on the existing EU-Bonds and EU-Bills that have the legal backing of the European Union and already have a well-established infrastructure. Other EU agencies, like the ESM or the European Investment Bank (EIB), also issue bonds but in much smaller size, under different legal arrangements. The ESM is an intergovernmental institution with different objectives. While a process could be designed to fold the ESM issuance into the European Union's unified funding approach as a way to further boost the size of EU-Bonds and EU-Bills, the different legal frameworks underpinning the European Union and the ESM would require changing the institutional nature of the ESM, suggesting that it is better to leave ESM bonds as a separate asset.
Conclusion
The bottom line is this: European fragmentation severely hampers its economic and geopolitical potential. European leaders have agreed to defragment the single market to boost market size and defragment investment to boost productivity. Our proposal complements these actions by defragmenting the sovereign bond market to lower financing costs.
European leaders must be upfront about it: If they choose not to boost the Eurobond market, they are choosing higher financing costs, lower potential growth, and weaker strategic autonomy. Creating a large, deep, and liquid Eurobond market is the lowest hanging fruit and the way for European leaders to show the world that they are serious about the European project. Time is up.
Note
1. Both MSCI and ICE, in their reviews in 2024 and 2025 respectively, found lack of consensus regarding including EU-Bonds and EU-Bills into their sovereign indices, in part due to the uncertainty about future issuance plans.
Data Disclosure
This publication does not include a replication package.
