Germany, the only large country of the Eurozone with an "excellent" credit rating (AAA), is pressured suffocatingly to accept joint borrowing and the issuance of the "cursed", if we remember the era of the European debt crisis that cost Greece three memorandums (2010, 2012, 2015), Eurobond. The reasons are the following: (a) Across the West, for a set of complex reasons that are not of the present moment, the real economy is ailing while stock markets are booming. Wall Street absorbs, due to the profits achieved mainly by Big Tech, a large part of global liquidity and investment capitals. The European debt market does not have as much depth or liquidity and is fragmented at a national level. (b) The pressures on the economy are suffocating due to the crisis of the developmental German export model, with the once-mighty car manufacturers, the "crown jewels" of German productive power, being threatened with aggressive takeovers by their competitors in China as they missed the electric vehicle train. In addition, factors such as the skyrocketing cost of social security and pension systems due to the aging of the economically active population are expected to adversely affect the fiscal position of the major European economies. (c) Geopolitical fragmentation with the distancing of the US from NATO requires the restoration of Europe's defensive capabilities and significant investments in the defense industry. Blanchard, former Chief Economist of the IMF and at the helm of the Peterson Institute for International Economics (PIIE), and Ubide made the proposal in 2025, and support for this initiative has increased, not only from think tanks and academics (Hildebrand, Rey and Schularick 2025), but mainly from the European Central Bank (ECB) (Lane 2026), the Bundesbank (Nagel, Politico, February 2026) and certain EU governments (Cuerpo, in the Financial Times, February 2026, and at a PIIE event). They update their proposal in a text of theirs and explain why the need for the issuance of Eurobonds on a large scale has increased. This need reflects three reasons.
First, necessity: Europe must accelerate the development of its strategic autonomy in order to manage the rupture of the international rules-based global order. The confrontation with the United States regarding Greenland and the growing doubts about the future of NATO make it clear that Europe cannot wait. Strategic autonomy requires three pillars, military, economic and financial power, and a safe asset constitutes a necessary condition for financial power. Europe cannot rely on American government bonds (US Treasuries), meaning an asset denominated in foreign currency, as a safe asset pillar of its economy. While the strengthening of military and economic power is a process of many years, the strengthening of the Eurobond market would have an immediate effect.
Second, they present it as an opportunity: There is growing global demand for European assets as a strategy of diversification away from American assets. Investors wish to diversify their geopolitical risk and Europe's fragmented bond market cannot fully meet this demand for safe assets. Despite the fact that Europe possesses 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 correspond to just under 50% of GDP in the European Union, compared to over 100% in the United States. Eurobonds, backed by the stable rule of law and the reliable institutions of Europe, would strengthen the supply of European safe assets and would offer an attractive alternative to US Treasuries.
Third, 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 facilities for central banks outside the eurozone. As stated by ECB Executive Board member Piero Cipollone, "if we lose control of our money, we lose control of our economic destiny". And the euro cannot evolve into a global international currency without an adequate supply of safe assets that meets investor demand.
Replacement of up to 25% of debt to GDP for every EU country
It is proposed to announce the replacement of up to 25% of GDP of the debt of every EU country with Eurobonds over the next few years. This can be achieved through a combination of two actions: exchanging existing national bonds for Eurobonds through buybacks and refinancing national bonds that expire with Eurobonds. The servicing of these Eurobonds will rely on the transfer of revenues from each member state, similar to today's contributions to the EU budget, enshrined in national legislation. With today's interest rates, the required transfer would amount to approximately 1% of GDP. This transfer to cover the interest of the Eurobonds will replace the direct payment of interest on the national bonds that will have been retired and, because the interest rates of the Eurobonds will likely be lower, it will constitute a net saving for member states. Here of course, for anyone who knows the bond market, the risk is excessively downplayed...
The Eurobonds will possess a double guarantee: the legal commitment of the European Union, as the issuer, for the servicing of the debt and, in the background, the national political and legal commitment to transfer the necessary revenues. EU-Bonds and EU-Bills already issued by the European Commission on behalf of the European Union are proposed as the medium, which already exist on a significant scale and possess established infrastructure in the repos and futures markets. The stock of EU-Bonds and EU-Bills will approach 1 trillion euros in 2026, constituting the fifth largest market after Germany, France, Italy and Spain. According to the proposal they submit, which could also include the consolidation of issuances from other supranational organizations of the EU, such as the European Stability Mechanism (ESM), the size of this market would increase to 5 trillion euros. Our proposal would address the main disadvantage of existing Eurobonds: they are classified as supranational bonds and not as sovereign bonds, a fact which reduces their demand and constitutes the main reason they have a higher yield than German Bunds. As argued by Bonfanti (2025), the legal classification as "supranational" instead of "sovereign" reduces the demand for EU-Bonds and EU-Bills by up to 80% compared to corresponding sovereign bonds. This is solely due to the legal categorization of supranational organizations as "quasi-governments" and is not related to the solvency of the bonds.
Refinancing of the Pandemic debt
From this perspective, it is critical that the European Union decides on the refinancing of the EU-Bonds and EU-Bills issued to finance the post-pandemic recovery program NextGenerationEU (NGEU), transferring to the markets the image of a stable and predictable issuance policy. With the increase of their size and the creation of a predictable issuance program, EU-Bonds and EU-Bills will be included in sovereign bond indices, significantly increasing their demand from global investors, reducing their yields and allowing them to acquire a negative beta with respect to 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 investments union and reducing the cost of public and private financing for all countries.
Would Eurobonds not create a moral hazard problem?
Concerns have been expressed, according to the authors of the study, regarding three ways through which moral hazard could arise, but none of them seems convincing to us. First concern: There is no explicit debt restructuring mechanism for national debts and consequently national governments would have an incentive to hide behind the safety of Eurobonds and pursue irresponsible fiscal policies. They do not consider this risk to apply, as Eurobonds would cover only debt up to 25% of GDP, whereas in the "blue/red" proposal of Delpla and von Weizsäcker (2010) they covered debt up to 60% of GDP, leaving countries responsible for the largest part of their debt financing and providing incentives for disciplined fiscal policies. It is also pointed out that the only example of large scale financing through Eurobonds that we possess, meaning the post-pandemic program NGEU, did not lead to irresponsible fiscal policies in its main beneficiaries, Spain and Italy.
Second concern: By creating a safe alternative to national bonds, member states will gain an incentive to press for increasing issuance of Eurobonds beyond 25% of GDP and for excessive support of national bonds by the ECB in periods of crisis. The authors consider this scenario unrealistic within the framework of today's European institutional framework. This concern can be addressed through explicit European legislation that will limit the issuance of Eurobonds to 25% of GDP, unless there is a unanimous decision to change the limit. Regarding ECB support, although we would expect both Eurobonds and national bonds to be part of its structural portfolio, there are clear ECB guidelines regarding the conduct of asset purchase programs, which exclude unjustified excessive support.
Third concern: Countries may, in periods of crisis, default on the revenue contribution that backs the Eurobonds.
Although this is always theoretically possible, we consider it extremely unlikely, because defaulting on these contributions would essentially amount to a political default against the European Union. In addition, there is no history of default on bonds issued by supranational organizations, nor a history of default on member states' contributions to the European Union, even at the peak of the euro crisis all countries continued to support the EU budget, while the United Kingdom as well, when it departed from the EU, settled all its outstanding financial obligations. Would Eurobonds mean that national bonds will become subordinate and more risky? No, at least not in the sense of CDS (Credit Default Swaps or risk premiums). In our proposal there is no "payment waterfall" defining priority of payments, but simply a separation of national revenue sources: one part of national revenues backs national bonds and another part backs Eurobonds. In addition, by reducing the risk of member states losing complete access to the markets due to self-fulfilling confidence crises, Eurobonds will also reduce the risk of the "doom loop" in national bonds, making them structurally safer. The "doom loop" in national bonds is a vicious cycle where:
1) the banks of a country hold many government bonds of the same country
2) the state begins to be considered financially risky
3) the value of the bonds falls
4) the banks suffer losses
5) the state might need to rescue the banks
6) thus the government debt increases even more
7) the markets fear the state more
8) the bonds fall even further. (This pattern is also applied in the Greek case).
Would Eurobonds function as safe assets?
There is not yet enough history for EU-Bonds and EU-Bills to assess their behavior under pressure conditions. As mentioned previously, their size remains small, their future issuance is uncertain and they are not included in sovereign bond indices, factors which increase liquidity premiums and significantly limit their investor base. Although the spread of EU-Bonds against German Bunds increased in periods of pressure in recent years, this increase was due to their supranational character and, importantly, occurred while the yields of German Bunds and US Treasuries were also increasing. In other words, all bonds behaved recently as riskier assets due to the inflationary nature of recent shocks. Today, the spread of EU-Bonds against German Bunds is similar to the spread of Spanish bonds against Bunds, meaning that EU-Bonds, although rated as AAA but classified as supranational bonds, have a spread similar to sovereign bonds rated A. This suggests that the problem of EU-Bonds is related today to liquidity and classification, not to solvency.
Will the yields of national bonds increase?
Marginal yields may increase while average yields will likely decrease. It is true that the introduction of safe Eurobonds means that default risk will concern a smaller volume of national bonds, thus increasing their relative risk. In bonds, "marginal yields" usually mean: how much extra profit/yield an investor gets when they assume a little more risk or buy additional debt. Therefore, this can lead to an increase in the spreads of national bonds, a Modigliani-Miller type proposition. To the extent that governments are funded marginally through national bonds, marginal yields may indeed increase. However, the average yields of public debt, including both national debt and, indirectly, their share in Eurobonds, will likely decrease. But the hypothesis may prove wrong: to the extent that the overall European financial system becomes safer, even the yields of national bonds may eventually decrease.
Will the interest rates of Eurobonds be lower than the yields of Bunds?
To the extent that they are treated as sovereign bonds, are considered safe and benefit from a deeper and more liquid market, they should trade with lower yields than Bunds. Realistically, however, as is the case with every new asset, it may take time for investors to absorb and trust them. Therefore, it may take some time for the yields of Eurobonds to become lower than those of Bunds. Probably, however, this will eventually happen.
Why is both an exchange of existing debt and a replacement of expiring bonds proposed?
Because if only expiring bonds were refinanced, it would take too long to achieve the target of 25% of GDP, while there would also be less control over the composition along the yield curve, since this would depend on the maturity schedule. The two approaches, however, are not mutually exclusive. It is noted that there would be no issue of pari passu (equal treatment) in the exchange process, as we do not propose an actual exchange but two simultaneous transactions: either the European Union or the national debt management offices will buy back national bonds and the European Union will issue EU-Bonds and EU-Bills of equal value. The Spanish government has proposed a variation of our proposal based initially only on flows: over the next five years, to refinance one-third of expiring bonds, as well as the new debt issuance related to future deficits compatible with the EU fiscal rules. Countries violating the EU fiscal rules will not be able to finance that part of the deficit. According to Spain's calculations, this would create a stock of Eurobonds of approximately 5 trillion euros within five years (statements of Carlos Cuerpo Caballero at a PIIE event, April 16, 2026).
Can countries with a low debt-to-GDP ratio participate? Yes.
The proposal is presented in the spirit of the "pragmatic federalism" recently advocated by the former Prime Minister of Italy, Mario Draghi: each member state can decide how much of its debt, up to 25% of GDP, it wishes to be financed through Eurobonds. This will facilitate member states with a low debt-to-GDP ratio and will ensure that each national bond market remains deep and liquid.
What would be the role of the ECB?
Beyond the issue of portfolio composition, it is critical that the ECB includes Eurobonds in the list of eligible assets for asset purchase programs and for its structural portfolio, so as to avoid artificial differences between Eurobonds and national bonds.
Why would the so-called "frugal" countries, like Germany, agree to this proposal?
Because it makes the European economy more stable and, therefore, improves the financing costs and economic prospects of Germany. The President of the Bundesbank, Joachim Nagel, seems to agree, as he recognizes "the benefits of creating a common European, highly liquid, pan-European safe benchmark bond" and that "action is required". In addition, given that, based on current German fiscal plans, the debt-to-GDP ratio is projected to rise to at least 80% within the next decade, financing part of it through Eurobonds would allow Germany to maintain its national Bunds market below 60% of GDP.
Goal is the reduction of financing costs
The bottom line is this: European fragmentation seriously limits Europe's economic and geopolitical potential. European leaders have agreed to de-fragment the single market to enhance market size and de-fragment investments to increase productivity. Our proposal complements these actions, de-fragmenting the government bond market so that the cost of financing is reduced. European leaders must state it clearly: if they choose not to strengthen the Eurobond market, they choose higher financing costs, lower potential growth and weaker strategic autonomy.
In this plan, three aims of the "deep state" of Brussels are united: they gain a greater say in the fiscal situation of states with additional guarantees and undo economic sovereignty in order to direct investments towards a war direction.
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