When the COVID-19 pandemic hit, the European Union did something it had never done before: it borrowed collectively, and at scale. The €750 billion NextGenerationEU programme turned the European Commission into one of the eurozone’s largest bond issuers almost overnight. Since then, EU-level debt has grown to roughly €1.26 trillion, still dwarfed by the €30 trillion US Treasury market, but no longer negligible.

Five years on, the question is no longer whether the EU can issue bonds. It demonstrably can. The harder question is whether EU bonds can become a genuine safe asset: the kind of liquid, credible, benchmark instrument that anchors financial systems, attracts global investors in times of stress, and provides the euro area with the fiscal infrastructure its monetary union has always lacked.

A long way from €0.8 billion

Before the global financial crisis, EU debt securities amounted to just €0.8 billion, mostly technical instruments for balance-of-payments assistance. By 2022, that figure had leapt to €344 billion. 

The Commission has since adopted more sophisticated issuance practices: a Unified Funding Approach that treats the EU as a single, multipurpose borrower rather than a programme-specific one; a growing use of auctions over syndications, which brings EU bond pricing closer to the transparent, competitive processes used by sovereign states. 

Since October 2024, a Repo Facility on Eurex has allowed primary dealers to borrow specific EU bonds when they are scarce. This last piece of market plumbing was conspicuously absent and explicitly cited by both MSCI (Morgan Stanley Capital International) and ICE (Intercontinental Exchange) when rejecting the Commission’s bid for inclusion in sovereign bond indices.

The spread between EU bonds and German Bunds, a key proxy for whether markets treat the two as equivalent, has narrowed considerably since the volatile early days of NextGenerationEU. In 2022, when Russia’s invasion of Ukraine triggered a flight to safety, investors rushed to Bunds rather than EU bonds, briefly widening the spread and exposing EU debt’s still-precarious safe-haven status.

However, since the beginning of the invasion, bid-ask spreads have tightened, and the Commission’s yield curve has deepened. Clearing house haircuts, the percentage reduction applied to the value of an asset used as collateral, have significantly fallen.

Why this moment is different

Three converging pressures have opened a window that the EU cannot afford to waste. 

First, US Treasuries, long the world’s default safe asset, are showing signs of strain. Fiscal overextension, political dysfunction in Washington, and a deteriorating outlook for the dollar’s role as a reserve currency have left global investors quietly scanning for alternatives. Second, Europe’s own defence and industrial ambitions require fiscal firepower that cannot depend on American-denominated capital markets or, implicitly, American goodwill. Third, the EU is mid-way through negotiations for its next Multiannual Financial Framework covering 2028 to 2034, a rare window in which structural decisions about borrowing and revenue can be made.

The Commission’s MFF proposal already includes a new borrowing instrument, Catalyst Europe, worth €150 billion over seven years to co-finance member states’ investment in energy, technology, and defence. That is smaller in magnitude than NextGenerationEU, but symbolically significant: for the first time, common borrowing is included not as a crisis response but as a standing feature of the EU’s fiscal architecture. The signal to markets that EU bonds will continue to exist and grow matters as much as the volume itself.

What is still missing

Yet for all the gains, EU bonds still fall short of true sovereign status and closing that gap requires more than patience. The most fundamental is the lack of taxation power. Sovereign issuers back their debt with compulsory tax revenues; the Commission’s budget still relies overwhelmingly on member state contributions based on national income. 

The proposed expansion of genuinely autonomous own resources, including revenues from the EU Emissions Trading System, the Carbon Border Adjustment Mechanism, and a new digital levy, would add an estimated €58 billion annually to the EU budget. That is meaningful, but still modest relative to the €1.26 trillion debt stock, and several of the proposals remain politically contested.

The exclusion of EU bonds from major sovereign debt indices illustrates the problem clearly. Both MSCI and ICE have rejected the Commission’s bid, citing, among other factors, the EU’s lack of taxation authority and the difficulty of distinguishing it from other supranational bodies. Without index inclusion, EU bonds remain outside the automatic purchasing flows of the vast asset management industry, limiting liquidity and keeping borrowing costs structurally higher than those of comparable-rated sovereigns.

The blue bond proposal

The most ambitious proposal on the table is the Blanchard-Ubide Blue Bond mechanism. Under this scheme, each member state would ring-fence a dedicated revenue stream, a share of indirect tax receipts, for instance, to service a common EU bond, with the proceeds used to buy back national debt on the open market. Over time, the result would be a gradual substitution of national bonds for a single, large, liquid European instrument. Proponents estimate a market of €5 trillion if blue bonds replaced 25% of each member state’s GDP in debt. At that scale, index inclusion and safe-haven status would likely follow automatically.

The proposal has attracted serious institutional endorsement, including from ECB board member Philip Lane and Spain’s Economy Minister Carlos Cuerpo. Even Bundesbank President Joachim Nagel has acknowledged the case for a common euro area safe asset, a shift in tone from Germany that would have been almost unthinkable five years ago. The main objections concerning moral hazard, national fiscal autonomy, and the risk of relegating remaining national bonds to second-tier status are real but addressable. Blanchard and Ubide argue that the mechanism is specifically designed to sidestep the legal and political obstacles that sank earlier Eurobond proposals. From a more supranational perspective, a deep blue bond market would itself provide investors with an instrument to hedge exposure to national red bonds, turning the two-tier structure into a structural feature rather than a flaw. National bonds would remain relevant, but within a more stable and liquid euro-area financial architecture. 

Three things the EU must do now

To start, protect Catalyst Europe in the MFF negotiations. Member states opposed to continued borrowing should understand that removing Catalyst would be read by markets as a signal that EU-level issuance has peaked, a self-defeating outcome that raises borrowing costs for everyone, including the frugals.

Additionally, advance the Blue Bond proposal. This is the only near-term pathway to the scale of common debt that would generate genuine safe-asset liquidity. It requires no treaty change and involves no debt mutualisation in the traditional sense. The political window, while European anxiety about US reliability remains high, will not stay open indefinitely.

Finally, expand genuine own resources. EU Emissions Trading System (ETS) and Carbon Border Adjustment Mechanism (CBAM) revenues should be explicitly linked to servicing EU debt. A direct connection between EU-level taxation and EU debt service would address the most fundamental objection markets have to treating EU bonds as sovereign-equivalent.

Europe is closer to a common safe asset than it has ever been. What will come next is in the hands of the MFF negotiators, who have a rare moment to make lasting structural choices, and the cost of letting it pass unused will compound quietly for years. Act now, or wait for the next crisis to force the question, at a far higher price.