The moment for expanding euro safe assets: securing Europe’s strategic autonomy
Strengthening Europe’s autonomy in both energy and finance should be treated as a matter of urgent priority rather than a distant aspiration, as the current energy crisis triggered by the latest Middle East conflict highlights. Pierre Schlosser, Rob Patalano and Morgan Despres explain their support for scaling up of the use of euro safe assets to create high-quality, deep and liquid debt markets and reduce the continent’s vulnerability to external shocks.
Energy security concerns, the accelerating climate crisis and mounting geopolitical tensions all require a coordinated European response. Scaling up euro safe assets would not solve these challenges on their own, but they would give Europe the financial capacity and strategic autonomy needed to confront them. The moment calls for political leadership and a willingness to act. Europe should seize it by establishing a common European safe asset.
The implications of international energy risks to Europe
Europe’s heavy reliance on imported, largely dollar-denominated oil and gas resources has once again been exposed by the latest flare-up of regional conflict in the Middle East, which has driven energy prices and volatility to unprecedented levels. As a result, capital markets have experienced a spike in risk premia, and rate markets are signalling a growing expectation of higher borrowing costs across Europe and major advanced economies due expectations that inflation will continue to rise. The OECD’s latest interim economic outlook highlighted that the euro area’s inflation rate is expected to rise from 2.1% in 2025 to 2.6% this year, driven largely by the energy-related shock from the Middle East. The episode is a stark reminder of how vulnerable the continent remains to external shocks from geopolitical tensions.
Other near-term spending demands, such as rising defence expenditure in many European countries, are also now adding to the longer-term fiscal pressures caused by ageing populations and climate change. The added pressures from these fossil-fuel-related events could exacerbate negative spillovers in sovereign debt markets and, due to intertwined sovereign and banking risks, could undermine bank solvency and asset quality, which would constrain lending to the real economy.
Beyond energy dependencies, the shifting geopolitical landscape has also brought another vulnerability into focus. The increasing US foreign policy influence through its dollar payment system has made clear how dependent Europe remains on financial infrastructures and currencies controlled elsewhere. At the same time, the global flight to gold (although more volatile than in the past years) reflects a broader shortage of safe assets in the international financial system.
The case for a European safe asset
We believe that the creation of a common euro safe asset in sovereign debt markets is the missing link of the European monetary integration – and long overdue.
Safe assets are “assets that have stable nominal payoffs, are highly liquid and carry minimal credit risk” and are particularly valuable during periods of financial market stress. A European safe asset would serve the purpose of enhancing financial stability, risk-sharing and monetary policy transmission across the eurozone, reducing the continent’s vulnerability to external shocks and strengthening Europe’s strategic autonomy in global markets. It would foster deeper economic integration, ensure continued borrowing costs for EU Member States, provide a reliable benchmark for both public and private investments and incidentally also provide a solid underpinning to the Savings and Investment Union. Common European safe assets would ultimately contribute to strengthening the international role of the euro.
The EU’s ratio of sovereign safe assets to GDP remains well below that of peers (see Figure 1, right-hand side), illustrating the extent of Europe’s missed opportunity to use its collective balance sheet to achieve an efficient cost of capital. Figure 2 illustrates that US and Canadian sovereign debt levels, which are currently categorised as safe AAA-rated assets, are well over 100% of their respective GDP. By contrast, the sum of European safe assets remains below 40% of total EU GDP. This highlights that policymakers should strive to capitalise on this fiscal opportunity to distribute gains from more effective debt management across the continent.
Figure 1. Sovereign bond rating v. debt-to-GDP ratio in the EU, 2024
Source: IMF, European Parliament (2024), Trading Economics
Figure 2. Safe asset share of sovereign-debt-to-GDP, Q4 2025
Note: Issuers of safe assets in the EU: Germany, Netherlands, Sweden, Luxembourg, Denmark, Austria and EU supranational bonds. Other sovereign assets include all other EU countries’ sovereign issuance. Chart includes all national and supranational debt up to Q4 2025.
Sources: Eurostat (2025), European Commission (2026), FRED (2026), Government of Canada (2026)
Why the time is right
We support the scaling up of the use of Eurobonds to create deep and liquid safe-asset debt markets. This concept first gained prominence during the euro crisis and has resurfaced repeatedly since then in different forms, without ever leading to a lasting political agreement. Yet the debate is evolving. We firmly believe that the current context, marked on the one hand by an acute energy crisis and on the other by a clearly assertive ‘America First’ agenda, creates a renewed and compelling case for decisive political agreement.
Even the Bundesbank, once among the most vocal opponents of common debt issuance, has recently shown signs of softening its stance. This is very clearly an underutilised benefit, in that it provides funds to other European countries at a better cost of capital than most of the sovereigns would be able to obtain based on their own credit rating and market liquidity. This means they can channel a greater amount of resources to critical areas for the EU’s competitive and resilient growth, and financial stability.
Collectively, Europe needs a common safe asset above and beyond the highly rated sovereign bonds of a portion of its member countries: to efficiently raise capital for initiatives that address events that are largely exogenous but common to individual countries, such as defence, energy security and climate resilience. In particular, the safe asset could help support an acceleration of the transition in Europe to renewable energy sources and enhanced energy efficiency, which would protect European economies against the growing fossil-fuel-related supply-chain shocks.
Attributes: low default risk, retaining value and liquidity
A European safe asset would be defined by three characteristics: maintains low default risk; retains value during periods of stress; and retains liquidity in most market conditions (see Brunnermeier and Huang, 2018; Gorton and Ordoñez, 2022). Based on these criteria, many European sovereign bonds do not currently trade as safe assets, either because they do not have a very high credit rating, because there is not sufficient market depth for trading, and/or because of the institutional features of the fragmented European bond markets. Europe’s financial fragmentation could further exacerbate market movements away from economic fundamentals. This causes a move to purchase just a few perceived safe assets, namely German sovereign bonds, due to their credit rating (AAA) and the market debt due to size outstanding at €1.3 trillion, as well as the aforementioned gold. Such a fragmentation is even more problematic within a currency union. (Note that Italy and France have higher amounts of sovereign bonds outstanding, but their high debt-to-GDP ratio results in ratings at BBB+ and A+, respectively.)
This raises the question of the extent to which European bonds, in various forms, behave as safe assets. EU-issued bonds receive AAA/AA ratings and the European Commission is expected to have approximately €1 trillion in bonds outstanding at the end of 2026, including SURE and NextGenerationEU (NGEU) bonds. As such, the EU bonds have the necessary attributes – creditworthiness and market debt – of a safe asset, above and beyond the current attributes of most European nations’ sovereign bonds, which in turn could bring tangible financial and economic benefits.
Notwithstanding these attributes, the evidence suggests that they continue to trade at a modest discount compared with similarly-rated European sovereign bonds. The suboptimal liquidity performance of the EU-issued bonds as a safe asset suggests that additional steps could be taken to strengthen the benefits to European nations. Research and anecdotal market evidence suggest that the lack of ongoing issuance of European bonds and related liquidity management are contributing to bonds’ suboptimal liquidity performance as a safe asset. (This Banca d’Italia paper shows how these benefits could be distributed.)
To this end, making joint issuance along the lines ofthe SURE and NGEU bond programmes a permanent feature of the European capital markets would help improve liquidity: it would ensure a flow of on-the-run issuance at different maturities, and would serve the growing needs of European and international investors who are seeking to diversify away from dollar-denominated safe assets (issuance of these bonds is planned to decline after 2026).
Greater institutional efforts could also be made to address the shortcoming that Eurobonds of this nature are not sufficiently represented on major sovereign bond indices. Partly, this is because market participants see the temporary nature of EU bond issuance as justifying their labelling as supranational rather than fundamental sovereign debt. Therefore, an EU commitment of future issuance and larger amounts of EU-based traded debt would strengthen the argument for inclusion in major sovereign bond indices.
Build on the NGEU to secure economic and financial benefits
Looking ahead, Europe must build resilience for the long term, especially as the climate crisis intensifies and energy systems undergo a profound transformation. Several detailed proposals for Eurobonds have been developed over the past decade (e.g. see the European Systemic Risk Board’s feasibility study). Their introduction would inevitably require a new European compromise between Northern and Southern Europe, reflecting the familiar pattern of political bargaining that has accompanied many previous steps in European integration. It is imperative that the benefits to all European sovereigns be articulated by this proposal.
Such a market would have important economic and strategic benefits. Sharp increases in Eurobond issuance could finance investments in European public goods, including climate change mitigation and adaptation, cross-border energy infrastructure and large-scale innovation projects, including public–private partnerships. Funding these longer-term projects at costs of capital associated with safe assets could help improve the resilience of the EU over the medium term and allow fiscal authorities to build buffers to address growing consequences of severe weather events and ensure sufficient adaptation measures are in place to protect vulnerable populations.
Moreover, the benefits of greater economic resilience and energy independence over the medium term would help protect the EU from the destabilising effects that fossil-fuel energy shocks will undoubtedly continue to have, particularly as confidence in multilateral institutions to manage these conflicts continues to be eroded.
For these reasons, the circumstances today also demand urgency. Europe cannot afford another decade of inconclusive debate as energy-driven inflation surges, and market contagion and the consequences of climate physical and transition risks continue to grow. The EU requires an estimated additional €400–620 billion of annual investment to meet its 2030 climate and energy targets, and the Middle East crisis is now contributing to expectations of rising borrowing rates in Europe, which will make this transition even more costly.
The most practical path forward would be to build directly on the experience of NGEU, to ensure the permanence of the bond programme and the tangible economic and financial benefits it will bring. The joint borrowing launched in response to the COVID-19 pandemic has shown that common issuance is both feasible and effective. Expanding and institutionalising this model could help create the deep and liquid safe asset market that Europe has long lacked.
Europe’s leaders face a clear choice
The geopolitical environment is becoming more uncertain, safe assets remain relatively scarce globally, and political attitudes within Europe are gradually shifting towards its added value (see again the recent shift in preference of the German Bundesbank). These conditions create a rare opportunity to move forward with a European safe asset, an idea that has long been discussed but never fully realised.
The authors would like to thank Aleksei Kiselev (European University Institute) and Kate Snelling (LSE) for their valuable research assistance.