Key messages
- The structural transformation of the international order has created a historic window of opportunity enabling Europe simultaneously to strengthen its strategic autonomy and its financial sovereignty. This paper sets out an overarching proposal that blends two complementary contributions: first, a financial design for a profound and liquid Eurobond market originally devised by Olivier Blanchard and Ángel Ubide at the Peterson Institute for International Economics; and, secondly, a geostrategic analytical framework that shows why this instrument is not only appropriate but also indispensable for overcoming Europe’s institutional paralysis.
- The central thesis unfolds at three levels. First, Europe faces a world where interdependence has ceased to be a source of shared prosperity and has become the main vector of coercion on the part of hegemonic powers operating under a logic of zero-sum or even negative-sum games. European vulnerabilities in energy, technology, defence and finance are not additive but multiplicative: weakness in one dimension amplifies the others.
- Secondly, the extreme heterogeneity of these vulnerabilities’ effects on each of the EU’s Member States –which will be referred to here as ‘national pain thresholds’– combined with the current European rules of governance –particularly the system of qualified majority voting– generates structural paralysis. The analysis to be set out here shows that no scenario of coordinated response to China is viable under the current voting rules and only two minor scenarios are viable in the case of the US. Game theory shows that only coalitions with credible compensation mechanisms between winners and losers can escape such a suboptimal Nash equilibrium.
- Third, the Blanchard-Ubide proposal to issue Eurobonds equivalent to 25% of EU GDP, worth around €5 trillion, simultaneously provides the safe asset that global investors seek as an alternative to the US dollar, the financial mechanism for the cross-compensations that would make coalitions of the willing viable and the cornerstone of a financial autonomy without which no other form of autonomy is sustainable. The proposal does not increase debt or the deficit: it restructures existing debt by exchanging national debt for senior Eurobonds, backed by an assignment of national VAT receipts to the EU.
- The proposal has garnered a highly positive reception. Philip R. Lane, member of the executive committee of the European Central Bank (ECB), has explicitly discussed the Blanchard-Ubide design as a pathway to broadening the European market for safe assets. The Center for Strategic and International Studies (CSIS) has described it as the most coherent proposal for Europe and Germany to leverage their monetary power. The convergence between the Letta and Draghi reports and the Blanchard-Ubide proposal comprises a consistent reformist triad: defragmenting the single market, defragmenting investment and defragmenting public debt.
Analysis
Introduction: the European moment
Europe is at a historic turning point. The international order that for decades ensured its security, facilitated its prosperity and enabled the construction of the most ambitious integration project in contemporary history has ceased to exist in the terms in which it was conceived. As the Canadian Prime Minister Mark Carney said, we are in the midst of a rupture, not a gradual transition within a recognisable framework: the framework itself has ceased to work.
In the speech he gave on 2 February 2026 at the University of Louvain, Mario Draghi gave this rather stark diagnosis: Europe faces a future in which it risks seeing itself subordinated, divided and deindustrialised at the same time. It is a future in which the US imposes tariffs, threatens European territorial interests and makes clear, for the first time, that it views European political fragmentation as conducive to its interests; and where China, which controls critical nodes of key global supply chains, is prepared to exploit this leverage over Europe.
Against such a backdrop, this paper sets out a proposal that is simultaneously financial and strategic. It is neither a technical exercise in debt engineering nor an abstract geopolitical analysis. It seeks to show that the creation of a massive Eurobond market is the necessary condition that will enable Europe to escape the institutional trap that paralyses it when faced by external threats; and that the window of opportunity for acting on this is open now.
The analysis is structured in four parts. The first analyses the transformation of the international order and its effects on European vulnerabilities. The second sets out the analytical framework of the hegemonic coercion and the ‘pain thresholds’ that account for European paralysis. The third formulates the financial proposal of Eurobonds and their connection to the theory of compensatory coalitions. Finally, the fourth provides a summary of the main reactions and debates that the proposal has elicited in the international political economy community.
The transformation of the international order
2.1 From a positive-sum game to hegemonic coercion
The world has gone from a paradigm of positive-sum games, where cooperation generated widely shared benefits, to one dominated by the logic of zero-sum or even negative-sum games. The change is not merely circumstantial: it reflects a profound reconfiguration of global hegemonic dynamics. What Thucydides noted 2,400 years ago in his Melian Dialogue has become alarmingly pertinent: the strong do what they can and the weak suffer what they must.
The extraordinary dividends reaped by the former international system of cooperation and interdependence speak for themselves. The emerging countries, which with more than 90% of the world’s population barely accounted for 20% of global GDP at the turn of the millennium, today account for 60% of global GDP at US dollar purchasing power parity. Despite the undoubted uplift to global well-being that this redistribution has entailed –and which goes well beyond share of GDP, as shown, for instance, in the article by Max Roser titled ‘The world is awful. The world is much better. The world can be much better’– a series of factors, prominent among which was China’s admission to the World Trade Organisation (WTO) and the blurring of boundaries between trade and security, have transformed the prevailing vision of the international order.
2.2 From normative power to transactional power
The international post-war system, designed predominantly by the US, was founded on rules, institutions and shared values, lubricated by a functional dose of hypocrisy that enabled the contradictions to be managed without destroying the institutional framework. Now it has been replaced by purely transactional power: the power of ‘pay to play’, embodied by the current US Administration, in which each interaction is a bilateral negotiation of immediate interests.
As Mario Draghi has observed, the former world order did not fail because it was built on an illusion: it produced real gains for the US as the hegemonic power, for Europe by enabling it to integrate into trading networks and also for developing countries. Its failure lay in what it could not remedy. Global trade became divorced from the Ricardian principle that exchanges should follow comparative advantage. Some countries pursued an absolute advantage by deploying mercantilist strategies, imposing deindustrialisation on others. Institutions of multilateral governance lacked the mechanisms for tackling these imbalances.
2.3 A multipolar world with multiple risks
The conventional analysis posits the scenario of a bipolar struggle between China and the US. History urges caution. In the Peloponnesian War, the established power won, but its victory was so pyrrhic that barely 30 years later a third party, Philip of Macedon, invaded Greece. The Greek city states never recovered their previously important role.
The resulting world will probably be multipolar, with more distributed powers. This prospect is not necessarily favourable to liberal democracy. In a context of exploitable vulnerabilities and the struggle for power, oligopolistic competition may increase the chances of economic, political and even military conflict.
European vulnerabilities: a multiplicative system
3.1 Interdependence as vulnerability
What for decades constituted Europe’s greatest strength, its integration into the global supply chains and its economic interdependence, has become its main source of vulnerability. The hegemonic powers have discovered that they can instrumentalise these interdependencies as political and economic coercion mechanisms. Carney described it with the precision of a central banker: countries that negotiate bilaterally with a hegemonic power negotiate from a position of weakness, accept what is offered to them and compete amongst themselves to be the most accommodating.
The analyses conducted by the Elcano Royal Institute identify four major areas of vulnerability: energy, technology, finance and defence. The weightings accorded to each synthesised indicator reflect the immediacy of the effect: energy scores 40% (the 2022 crisis showed how an energy shortfall had instantaneous effects); technology 35% (the dependence on advance semiconductors is structural); and defence 25% (critical and yet, until not so long ago, mitigated it was thought by NATO guarantees).
3.2 The multiplicative nature of the vulnerabilities
One of the most serious errors in addressing the new order lies in the excessive specialisation of the analyses. Each vulnerability is addressed by specialists who devise sectorial strategies. But the vulnerabilities are not additive but multiplicative.
Energy and technology vulnerabilities do not get added to each other; they multiply each other. Without renewable and competitive energy sovereignty there is no industrial capacity for making semiconductors. Without an adequate industrial and technological base, the defensive vulnerability perpetuates itself: 27 fragmented armies with duplication of capabilities and an inability to exert their strength without US logistical support.
The effects on the EU as a whole of this multiplicative interdependency of national vulnerabilities are devastating. Bearing in mind that the most sensitive variables of the indicator exhibit highly significant levels of external dependency,[1] the model predicts that 70% of EU countries would undergo an ‘extreme shock’ if any of these supplies were to be interrupted.
If the vulnerabilities are not independent, it is rational to assume that any plan that is based on individualised management strategies of each of these dependencies will be unsuccessful because the diagnosis is intrinsically incorrect and the application of this sectoral strategy will inevitably create bottlenecks in the implementation of the plan. Fragmented policies will not suffice: what the EU needs is a strategy that addresses the problem systematically.
‘Pain thresholds’ and institutional paralysis
4.1 The cartography of European resistance
The EU faces a structural dilemma: the extreme heterogeneity of national vulnerabilities hinders the formulation of coordinated responses. The 27 Member States have radically distinct ‘pain thresholds’ amid the various sources of hegemonic coercion.
A country’s ‘pain threshold’ is defined as the highest level of an external shock that it can absorb before being obliged to capitulate or block a collective response.
A low threshold means that the country will quickly abandon any collective response coalition; a high threshold indicates a prolonged capacity for resistance. The threshold is quantified by weighing economic resistance, the diversification of trade and energy sources, the ability to substitute critical imports and the political tolerance of the society in question. Scores are standardised between 0 and 1 and are validated using a Monte Carlo simulation with 10,000 iterations.
4.2 Asymmetries regarding China
In the case of a shock originating in China, Belgium has the lowest threshold (0.20), caused by the importance of the role played in its economy –directly and indirectly– by activity at the port of Antwerp. It is followed by Hungary (0.25), whose vulnerability blends political alignment with Beijing and dependence on Chinese investment stemming from its New Silk Road membership. Germany is at an intermediate level (0.30), burdened by the dependency of its car and machinery industry on the Chinese market. France (0.55) benefits from its commitment to autonomy in defence and less dependency in trade, while Poland (0.60) is the least vulnerable thanks to its low economic exposure to Beijing.
4.3 Asymmetries regarding the US
Asymmetries regarding the US are even more pronounced. Ireland has the lowest threshold of the EU (0.10): approximately 45% of its GDP relies on US technology platforms. The Baltic States cluster in a similarly low range (0.12-0.18), affected by their existential dependence on NATO as the guarantor of their security against Russia. Poland shares this factor of military alignment (0.15). At the other end of the scale, France (0.65) is the most resilient country by some distance thanks to its autonomous nuclear capability.
4.4 The voting system as an exploitable vulnerability
The heterogeneity of the thresholds interacts with the institutional architecture to create paralysis. The reinforced qualified majority system requires 55% of Member States representing at least 65% of the population. A blocking minority needs at least four Member States that jointly account for more than 35% of the population.
In the face of a Chinese shock, a blocking coalition comprising Germany, Hungary, Austria, the Netherlands and Belgium, five Member States with 29% of the population, would not formally reach the threshold. But Germany’s ability to recruit other Member States connected to its value chains would raise the percentage to 36%-38%, creating an effective blocking minority. The outcome: of the five sanction scenarios analysed involving China, none is viable under qualified majority voting. Only two out of five scenarios involving the US turn out to be viable and both would take the form of political declarations without any real consequences.
The qualified majority system has become one of the EU’s most concerning strategic vulnerabilities. It is not a design failure: the EU was conceived for a world of multilateral cooperation, where the main risk was that the large Member States would impose stipulations on the smallest. Its institutions were fine-tuned to manage this tension, not to defend themselves against external hegemonic powers prepared to exploit the asymmetries between its members.
Essentially, the EU is a herbivore obliged to survive in an ecosystem of predators. It can only respond forcefully to adversaries that do not have potential direct victims within their borders (Iran and North Korea) or that cross existential red lines (Russia and its invasion of Ukraine).
From the prisoner’s dilemma to compensatory coalitions
5.1 The suboptimal equilibrium trap
Each Member State faces a choice: either cooperate with the collective EU response, accepting potentially high domestic costs, or protect its immediate national interests by blocking coordinated action.
If negotiations proceed by addressing each vulnerability in isolation, each Member State will veto the measures that threaten its specific interests and the result will be perpetual paralysis.
This structure fits the classic model of the prisoner’s dilemma. In other words, if everyone cooperates, Europe becomes collectively stronger. But individually each country has an incentive to defect: Germany, to protect its trade with China; Ireland, to safeguard its income from the tech platforms; and Poland, to avoid risking its security alliance with Washington.
The result, as the theory predicts, is a suboptimal Nash equilibrium: all end up worse off than if they had cooperated and each Member State, believing that it was protecting its own interests, is more exposed to bilateral coercion.
5.2 The fundamental theorem: cross-compensations
Game theory posits that coalitions are durable and credible when the winners are prepared to compensate the losers. If we conducted this exercise by taking each vulnerability in turn, the number of compensations required would be unfeasible. By addressing the vulnerabilities in a comprehensive way, however, taking advantage of the fact that the pain thresholds vary enormously between countries and dimensions, the net number of compensations required plummets.
A country like Poland, with a high threshold regarding China (0.60) but a low threshold regarding the US (0.15), may accept a trade dispute with China if it receives credible guarantees that its defensive vulnerability will be covered by a European defence mechanism. France, with high thresholds regarding both adversaries, is the main beneficiary of a more autonomous Europe and may finance compensations for the most exposed. The intersection of vulnerabilities allows cross-compensations that drastically reduce the net cost.
In simple terms, this is the fundamental theorem of welfare economics applied to geopolitics: a change of policy benefits the whole if the total gains exceed the total losses and if there are credible transfer mechanisms. That being said, it is essential to note that in the absence of this second condition, the credibility of the compensation, the first is irrelevant. Put another way: the alternative to the integrated approach is to remain in a suboptimal Nash equilibrium, exposed to the bilateral coercion of the two hegemonic powers who are playing negative-sum games.
Draghi has termed this approach pragmatic federalism: taking the steps that are currently possible, with the partners that are currently willing, in the contexts where progress can be made.
The euro is the most successful example: those who were willing made progress, built joint institutions with real authority and, by means of this shared commitment, forged a deeper solidarity than any treaty would have contrived. Since then, nine more countries have chosen to join.
The financial proposal: Eurobonds to the value of 25% of GDP
6.1 The real battleground: financial sovereignty
Dwelling on the tariffs war or contributions to NATO means only partly tackling the underlying problem. Behind every US dollar of international trade there are US$7 of financial transactions. The US can do what it is doing because it is the hegemonic power of the global financial system: 80% of all international financial transactions are conducted in US dollars. The US’s real power of coercion does not reside in tariffs but in its control of the financial system.
The market in German bunds represents less than 10% of the market in US treasuries: €2.5 trillion as opposed to US$30 trillion. The Eurobonds already issued as part of the Next Generation EU (NGEU)programme, the European Stability Mechanism (ESM) and the European Investment Bank add up to slightly more than €1 trillion.
In conclusion, Europe simply lacks a financial instrument of sufficient scale to constitute a credible alternative to the US dollar.
6.2 Design of the Blanchard-Ubide proposal
The proposal, published by the Peterson Institute for International Economics, involves replacing 25% of EU countries’ GDP with Eurobonds, equivalent to approximately €5 trillion. It is not an instrument for increasing spending or indebtedness: it is a restructuring of existing debt designed to reduce financing costs for all Member States.
The mechanism operates via two complementary pathways:
- Exchanging existing national debt with Eurobonds.
- Refinancing national debt as it matures in the future with issues of Eurobonds.
In practice there is no physical exchange of certificates, only a programme of simultaneous purchases and emissions by a European agency.
The Eurobonds would be backed by a twofold guarantee. First: a legislative undertaking on the part of each Member State to transfer a percentage of its VAT revenues to the EU, which could represent around 1% of the EU’s GDP. Secondly: the EU’s legal commitment as the issuer to service its debt. Eurobonds would de facto be a super-senior asset: default would be the equivalent of a political default of the EU, something qualitatively distinct from and with a reputational cost incomparably greater than a default on national debt.
6.3 What the proposal is NOT
Three fundamental aspects distinguish this proposal from previous attempts that foundered. First: it is not proposed to direct the Eurobonds towards specific spending programmes, unlike the schemes linked to financing new policies. Secondly: there is no proposal to increase either debt or deficits to exceed the already-existing consolidation plans; in other words, the fiscal and budgetary framework approved in April 2024 regarding the reform of the Stability and Growth Pact.[2] Third: no ‘joint and several’-type solidarity guarantee is required of Member States in the way that it was in Delpla and Weizsäcker’s original Blue/Red proposal.
What it does propose is optimising the management of debt to satisfy the new global demand for safe European assets and reducing the cost of all countries’ financing, both public and private. The goal is for Eurobonds to attain the status of beta negative, which is to say that when there are upheavals in the global share markets, the market price of the Eurobond rises and therefore its interest rate falls; a beta negative trait such as US treasuries consistently exhibited until not very long ago.[3] Ensuring, in other words, that Eurobonds become a safe-haven asset.
Having a safe-haven asset that rises in price when the market falls would provide the EU with anti-cyclical stability and create a deep and liquid yield curve for Eurobonds that would aid and stabilise the European corporate market. It would constitute awin-win for both the private and public sectors.
6.4 Why 25% of GDP?
The choice of 25% reflects a balance between two forces. On the one hand, a large-enough volume of bonds would create a deep and liquid market and would attain the critical mass needed to ensure that the investments in market infrastructure are made (derivatives, repurchase agreements and futures) and that Eurobonds are included in sovereign indices. On the other hand, this volume –€5 trillion– would ensure the assignment of national tax receipts to ensure the solvency and servicing of the Eurobonds was not excessive, something that in present circumstances is desirable given the fiscal stress and high effective rates of fiscal effort exhibited by many European countries. Countries with a low debt/GDP ratio could create a ‘coalition of the willing’, increasing their swaps of national debt for Eurobonds, replicating the aforementioned logic for compensatory coalitions amid geopolitical vulnerabilities.
6.5 Why now? Three convergent reasons
Need: strategic autonomy does not rest solely on military capability; it requires financial strength. Without a safe European asset, financing any defence initiative or supporting allies depends on the financial system denominated in US dollars; in other words, on the tacit consent of Washington.
Opportunity: recent empirical evidence confirms that the window of opportunity is real and quantifiable. Hanno Lustig at the University of Stanford has shown in his analysis titled ‘The safe assets that weren’t’ (February 2026) that US treasuries are losing their status as a safe asset. The treasury basis –the premium that investors paid for real US treasuries as opposed to synthetic versions constructed on the sovereign bonds of the G10– has disappeared and has even been inverted over long timeframes: US treasuries maturing in five-10 years are already being quoted at a discount. More significantly, the flight-to-safetymechanism has ceased to function: as already pointed out when discussing the beta negative status of US bonds, in March 2020 (COVID) and again in April 2025 (Trump tariffs) investors sold US treasuries rather than buying them and the US dollar fell while yields rose. This trend is diametrically opposed to the historical pattern. As Lustig points out, citing the Belgian economist Robert Triffin, in order to supply sufficient safe assets to the world, the US has fiscally over-extended itself. The rest of the world has US$21 trillion in US dollar-denominated safe assets and is starting to question whether they really are safe. This unsatisfied demand is exactly what a profound Eurobond market could capture.
Institutional backing: the ECB has moved from a neutral position regarding the international role of the euro towards an actively promotional position, as shown by Christine Lagarde’s speech in Berlin on 26 May 2025. The euro cannot aspire to being a benchmark international currency without a safe asset of the scale and liquidity that only Eurobonds can provide. And without such an asset it is impossible to conceive of the development of euro-denominated stablecoins that compete in the digital payments ecosystem with US dollar-denominated versions, or, in the medium term, with their foreseeable Chinese digital alternatives.
The nexus between Eurobonds and compensatory coalitions
The connection between the financial instrument and the geostrategic framework is not incidental; it is inherent. Eurobonds to the value of 25% of GDP fulfil a threefold function that no other instrument can replicate.
First, they create a safe asset that acts as an alternative to the US dollar and that global investors seek, reducing the costs of financing throughout Europe and, by extension, for private European capital. A profound and liquid Eurobond yield curve would sustain a European corporate market of a scale needed to compete with its US counterpart.
Secondly, they provide the mechanism of credibility for the cross-compensations that make the coalitions of the willing viable. With a financial instrument on this scale, the promise to compensate the losers from reforms that seek more autonomy ceases to be rhetorical and becomes an undertaking backed by flows of real capital. If Ireland is obliged to accept measures that irritate Washington, the financial compensation through verifiable reductions in its financing costs becomes tangible and quantifiable.
Third, they strengthen financial autonomy, without which no other form of autonomy is sustainable. Autonomy in energy, technology and defence requires massive investments that, without financial sovereignty, will rely on a system denominated in US dollars; in other words, on the consent of the hegemonic power whose coercion is being resisted.
The financial proposal and the geostrategic framework are mutually self-reinforcing. Without the analysis of vulnerabilities and pain thresholds, Eurobonds would seem a technical exercise in debt optimisation. Without Eurobonds, the geostrategic diagnosis would lack the instrument that renders it politically viable.
The reformist triad: Letta-Draghi-Blanchard/Ubide
A notable convergence has emerged in the ecosystem of European thought involving three diagnoses and proposals that, taken together, constitute a coherent reform programme. First is the Letta Report, which proposes defragmenting the single market in order to gain scale, eliminating the barriers that hinder European companies from attaining the size needed to compete globally. Secondly is the Draghi Report, which proposes defragmenting investment to gain productivity, identifying a gulf in annual investment of various hundreds of thousands of millions, which explains the difference in growth compared with the US. Last is the Blanchard-Ubide proposal, which suggests defragmenting public debt to reduce financing costs, creating the financial conditions that would make the two preceding reforms viable. The three elements stand in mutual need of each other.
A more integrated single market generates the trade flows that justify the scale of the Eurobonds. Defragmented investment generates the growth that backs the sustainability of joint debt. And liquid Eurobonds provide the competitive cost of capital that makes investment profitable and the single market attractive. It is a virtuous equilibrium whose activation requires a coordinated political push.
Draghi closes his argument with a formulation that makes a direct connection with the foregoing analysis of coalitions: unity does not precede action; it is forged by taking consistent decisions together on the basis of the shared experience and solidarity that are created and realising that we can bear the consequences. Whenever the EU has moved towards federation –in trade, competition, the single market and monetary policy– it is respected as a power. Whenever it has not done so –in defence, industrial policy and foreign affairs– it is treated as a scattered collection of mid-sized states.
Reactions and debates
9.1 Institutional support
The Blanchard-Ubide proposal has generated considerable debate since its publication in May 2025. In the institutional realm, the most significant backing has come from the ECB. Philip R. Lane, member of the Executive Board, explicitly discussed the proposal in his intervention at the Government Borrowers Forum in Dublin in June 2025, singling it out as a specific pathway for broadening the offer of euro-denominated safe assets. Lane said that while there is an inherent trade-off in the scale of the issue, setting it at 25% of GDP would represent an appropriate balance between the liquidity of the new instrument and the preservation of national fiscal sovereignty.
The change of the ECB’s stance on the international role of the euro, passing from neutrality to active promotion, provides unprecedented institutional backing. As Ubide emphasised to Bloomberg, the euro cannot function as a true international currency without a safe asset comparable in scale and liquidity to US treasuries. The ECB seems to have absorbed this reasoning.
In the academic and think-tank community, the CSIS has described the proposal as the most integrated for ensuring that Germany and Europe leverage their monetary power, observing that the German fiscal reform of March 2025, which broke with decades of constitution-bound ordoliberalism, opens a window of opportunity for Berlin to accept an emission of Eurobonds on this scale.
Hanno Lustig’s analysis of the US treasuries’ loss of status as a safe asset provides an additional empirical foundation: if Europe manages to issue Eurobonds with the fiscal discipline that the US has lost –backed by specific revenues and with no unfunded fiscal expansions– it could restore the beta negative property that US treasuries have forfeited, becoming the only large-scale sovereign asset that offers genuine anti-cyclical protection.
9.2 Objections and nuances
The main objections come from three sources. The first is the traditional argument of moral hazard, historically predominating in Germany and the frugal countries (the Netherlands, Austria and the Nordic countries).
The objection argues that mutualising debt would reduce the incentives for fiscal discipline in the most indebted countries. Blanchard and Ubide counter this by arguing that the proposal is not a ‘mutualisation’ in the strict sense: Eurobonds are backed by specific revenues (VAT), not by undertakings of solidarity, and do not add to total debt. Moreover, the coexistence of national debt and Eurobonds generates a two-level system where the spreadof the national bonds acts as an incentive to fiscal discipline, similar to the effect of abundant reserves on banking discipline.
Lorenzo Bini Smaghi, former member of the ECB’s Executive Board and current chairman of Société Générale, has pointed out an important detail: Eurobonds can serve to finance new expenditure or to create a safe asset, but it would be hard to achieve both ends simultaneously. According to his analysis, the safe-asset goal requires an instrument of approximately €5 trillion, a figure that coincides with the Blanchard-Ubide proposal, but the financing of European public goods would also require a European budget supplemented by its own resources. Bini Smaghi has also suggested that the ESM, with more than €600 billion in capital at its disposal, could be the issuance vehicle acting as an alternative to the European Commission.
The second type of objection comes from those who argue that increasing the scale of bond issues does not resolve the fundamental problem: that EU bonds are listed as supranational, not as sovereign and are therefore not included in indices of sovereign debt. A recent analysis drawn up by CEPR/VoxEU shows that the spread of EU bonds over German bunds has averaged 50 basis points since 2022, even exceeding Spain’s spread, despite having a much higher rating. The argument is that only a change in the classification, from supranational to sovereign, would narrow the spread, regardless of the volume. The Blanchard-Ubide proposal counters that the critical mass of the bond issue, combined with the certainty regarding future issues and their inclusion in ECB purchase programmes, would force precisely such a reclassification.
The third source is political-institutional: the legal viability of an exchange that bestows seniorityon Eurobonds over existing national debt. Blanchard and Ubide acknowledge this issue, but note that the already existing EU bonds are backed by national contributions to the EU budget and are de facto senior, with no legal challenges having been triggered. Moreover, they propose an operating mechanism (purchases of national debt with simultaneous emissions) that avoids a direct formal exchange.
9.3 Favourable political context
The European Parliament, through its EGOV department, has analysed the proposal as part of a wider study of the international role of the euro. The report acknowledges the logic of the proposal, but counsels, taking its lead from the German Council of Economic Experts, about the need for any progress on mutuality to be accompanied by progress on fiscal discipline and on the rupture of the sovereign-banking nexus.
However, the political context has changed considerably since the 2010s.
The German fiscal reform of 2025, which partially lifted the constitutional debt brake to enable massive expenditure on defence and infrastructure, has broken a taboo that had seemed sacrosanct. The NGEU precedent during the pandemic showed that the issuing of joint debt is viable when the urgency justifies it. And the growing perception of an existential threat, whether from Russia or from the US’s tariff policy, is creating the necessary political pressure to ensure proposals that would have been rejected outright five years ago now receive serious consideration.
9.4 The chicken and the egg
Blanchard and Ubide’s proposal relies on a risky hypothesis: if a sufficient volume of Eurobonds is issued, the continuity of future emissions is guaranteed and the backing of the ECB is secured by their being included in its purchase programmes, then markets will end up treating them as safe assets, forcing the ratings agencies, index providers and portfolio managers to reclassify them at the same level as German bunds and US treasuries. In short, the mere fact of offering the asset will ensure that the Eurobond is treated as a safe asset.
9.5 But what if they are wrong?
US treasuries and the US dollar did not become the global safe asset that they are today because Alexander Hamilton designed them well, but because there was a detailed institutional design that enabled the emergence of a solid federal fiscal capability, a single treasury with its own tax-raising powers and because it was unequivocally demonstrated that the system was capable of overcoming successive crises as they arose.
At the end of the 18th century the new federal state lacked a consolidated fiscal capability, a truly unified treasury or a tax-raising power that could be regarded as credible. The debt incurred by the War of Independence was fragmented between various levels of government and had been negotiated with major discounts, a sign of the lenders’ distrust of the federal government’s ability to meet its commitments. Hamilton’s reforms laid the foundations for a federal fiscal architecture, but their credibility was not established by the mere fact of their being adopted.
The assumption of state debts by the federal government, far from being a simple exercise in accounting, constituted a high-risk political commitment that tied the financial survival of the new state to its ability to raise its own revenues and successfully service its debt on a regular basis. This commitment was almost immediately tested. The financial panic of 1792 revealed the fragility of public debt markets and the coordinated response of the Treasury, acting as a de facto stabiliser of the financial system, established the precedent that the federal government would not allow the market in its own liabilities to collapse.
Shortly afterwards, the Whiskey Rebellion showed that fiscal capacity was not only an administrative issue but also a matter of coercion. The decision to enforce an unpopular federal tax using military might confirmed that revenue-raising would not depend on either the voluntary acquiescence of taxpayers or of the states, but rather on a central authority willing to impose it. Meanwhile the shocks caused by the European wars of the 1790s subjected the fledgling republic to significant external tensions, with repercussions for trade and the taxable base, without this translating into payment suspensions or an erosion of the real value of the debt.
Throughout this succession of financial, fiscal, political and geopolitical crises, the US federal system was garnering a reputation for compliance under adverse circumstances. The safety of the asset was not something it had from inception but rather an emerging by-product of repeatedly demonstrating that the federal state had a single treasury with its own tax-raising power and the political and institutional capacity to defend both amid conditions of stress. In this respect, US treasuries and the US dollar became safe assets because the institutional latticework that supported them was capable of overcoming and adapting to successive crises without breaking the fundamental promises upon which lenders’ trust resided.
The proposal seems to be suggesting that Europe could skip this entire intermediate phase –which was long and hard– and go straight to the end of the story. The Eurobond proposal aspires to creating credibility ex ante through institutional design, without having navigated a comparable sequence of crises that are dealt with in a consistent way at the federal level.
The problem is that financial markets do not wait for institutional architectures to mature. Their logic is neither pedagogical nor patient, but rather immediate, often implacable. From the very moment that an instrument comes into existence, the markets start to test the solidity of the guarantees that support it and the political cohesion of the institutional framework on which it depends. During this phase –which may be fleeting or last for years– the Eurobond market will operate as a large-scale laboratory. The first test will be almost mechanical: the market’s assessment of the guarantee structure surrounding the new asset. If Eurobonds persistently trade at a positive and significant spread compared with the bund, such a premium will reflect not only financial risk but also a fundamental doubt as to the credibility of the EU’s institutional edifice as a whole. A supposedly joint asset that fails to match a predominant national benchmark would by definition undermine the narrative of irreversibility that its supporters hope to use as the basis for construction.
Here there is an additional risk of a diabolical feedback loop. Currently, the perverse relationship between sovereigns and banks operates fundamentally through national bonds. The advent of Eurobonds trading at a discount could create a negative feedback mechanism of a new kind. If bank balance sheets increasingly incorporate the new European ‘safe asset’, which then loses value in situations of stress, the erosion of confidence would quickly transfer to the financial market.
There is also a potential trap for the ECB. Including Eurobonds in the ECB’s purchase programmes would convert monetary policy de facto into the ultimate backstop of fiscal integration. Such a development could open only two possible pathways. If it works, the act of mutualising debt will have come about by an indirect route, without any corresponding or explicit political or fiscal anchorage. If it fails, the price will be paid by the balance sheet and independence of the ECB, probably the EU institution with the greatest stock of accumulated credibility. In both cases the systemic risk is considerable. Lastly, the markets will put the political commitment to the test. The first major crisis –the election of an openly populist government in a large Member State or a serious conflict surrounding fiscal rules– will be the chance to check whether the commitment to Eurobonds is truly irrevocable or whether, if push comes to shove, it is liable to crumble.
The EU experience offers clear precedents. The crisis afflicting the European Monetary System in September 1992 showed the extent to which the markets are capable of shattering commitments that political leaders believe to be binding, but that lack fully credible institutional backing.
None of the above should be interpreted as a rejection of the proposal. On the contrary: it is the best and most developed proposal that Europeans have tabled for some time. The problem is not the Eurobond per se so much as the hypothesis that the mere offer of the instrument could replace the credibility that is only acquired through demonstrating fiscal strength, political cohesion and institutional resilience under pressure. The ‘egg’ can help to create the ‘chicken’, but only if mechanisms are introduced that reproduce, in a credible way, whatever it is that has historically ensured the safety of other assets.
This entails equipping Eurobonds with explicit safeguards: clearly defined fiscal back-ups, automatic adjustment rules that do not rely on ad hoc negotiations and irreversibility clauses that reduce perceptions of political risk to a minimum. Without such elements, the new asset would not absorb systemic risk but instead make it visible and amplify it.
Ultimately the argument is more structural than circumstantial. A safe asset is not simply a well-designed financial instrument; it is a political institution distilled into a certificate. If the certificate fails, the institution is left exposed. And if the institution is incomplete, the certificate becomes an immediate manifestation of its weaknesses. This explains why markets do not offer learning periods: they read prices as judgements on the underlying political architecture. Put another way, the proposal is not a matter of financial engineering but rather one of state construction under conditions of stress. If the goal is for the Eurobond to herald the arrival of European integration, it is essential to treat it as such and not as a shortcut. Its success will depend not so much on the initial announcement as on the dimension of the reforms, the clarity of the political commitment and the EU’s capacity to demonstrate, prior to and during its introduction, that it can sustain the system when the first major acid test inevitably arrives.
Conclusions
1. The international order has undergone a structural upheaval that demands new instruments, not incremental adaptations. Europe inhabits a world where the hegemonic powers instrumentalise interdependency as a mechanism of coercion and where transactional power has replaced normative power.
2. European vulnerabilities in energy, technology, defence and finance are multiplicative, not additive. Segmented analyses lead to misdiagnoses and ineffective strategies. Up to 70% of EU countries would undergo an extreme shock if hegemonic coercive threats became a reality.
3. The extreme heterogeneity of national pain thresholds, combined with the qualified majority voting system, creates a structural paralysis that is confirmed by quantitative analysis: no coordinated response scenario against China is viable and only two minor scenarios against the US are viable.
4. Game theory shows that only coalitions with credible cross-compensation mechanisms can escape the current suboptimal Nash equilibrium. An integrated approach to the vulnerabilities, exploiting the asymmetry of pain thresholds, drastically reduces the net cost of these compensations.
5. Issuing senior Eurobonds equal to 25% of EU GDP, around €5 trillion, simultaneously provides a safe asset as an alternative to the US dollar, the credibility mechanisms for cross-compensations and the cornerstone of financial autonomy. The proposal increases neither debt nor the deficit but rather reorganises the existing structure, backed by VAT revenues equivalent to 1% of GDP.
6. The convergence of the Letta (defragmenting the single market) and Draghi reports (defragmenting investment) and the Blanchard-Ubide proposal (defragmenting debt) constitutes a coherent reform programme whose elements are mutually reinforcing.
7. The institutional reactions have been notably positive. The ECB has transitioned towards the active promotion of the euro. Philip R. Lane has explicitly discussed the proposal as a specific pathway. Germany’s 2025 fiscal reform and the NGEU precedent show that jointly issued debt is politically viable when the urgency justifies it.
8. Legitimate objections regarding moral risk, supranational classification and legal viability can be met with solid technical responses but will require work on institutional design that needs to start immediately. Olivier Blanchard and Ángel Ubide suggest setting a deadline of 1 January 2028. There will be no action unless a date is set.
9. The window of opportunity is now. Global investors are querying the stability of the US dollar and seeking alternatives. Missing this historic chance to create a European safe asset on a global scale would involve accepting higher financing costs, a more unstable economy and, ultimately, renouncing strategic autonomy.
10. Mark Carney is right: the time to take down the sign from the shop window has arrived. Mario Draghi is also right: power requires transitioning from confederation to federation. But no strategy will be viable unless it rests on actively defending the principles of liberal democracy. European integration is constructed differently: not on the basis of force but on the basis of common will; not on the basis of subordination but on the basis of shared benefits. What started amid fear, as Draghi said, should continue amid hope.
11. The Eurobond proposal should not be interpreted as a financial shortcut but as an institutional construction project. History shows that truly safe assets are not created by decree or exclusively by the volume that is issued, but that they emerge when there is credible fiscal capability, unequivocal political backing and a demonstrable track record of resilience amid crises. Europe needs Eurobonds, but it needs them to work. Issuing them without sufficient safeguards would be the equivalent of placing a high-risk bet on the credibility of the entire European project.
Eurobonds can contribute to creating the conditions of their own success, but only if they are accompanied by explicit mechanisms that credibly replace the historic tests that other assets have overcome: clearly defined fiscal backing, automatic adjustment rules, irreversibility clauses and a political commitment capable of withstanding the first major crisis. Without such elements, the new instrument would highlight and amplify systemic risk rather than absorb it. Ultimately, a safe asset is not merely a well-designed financial instrument; it is a political institution distilled into a certificate. If the institution is incomplete, the certificate exposes it. The debate about Eurobonds is thus not a technical question but a strategic decision about the dimensions, sequence and depth of European integration. The success of the project will depend less on the initial announcement than on the EU’s capacity to demonstrate, before and during its introduction, that it is capable of sustaining the project when the first great stress test inevitably arrives.
[1] A 95% dependency on China for rare earths; a vulnerability to the supply of Russian gas that, although it has fallen from 40% to 15% as an EU average in 2024, is still critical in Central and Eastern Europe, and a 90% dependency on advanced microchips from Taiwan.
[2] The reform of the Stability and Growth Pact, which came into force in April 2024, is the most significant change in European fiscal governance since the global financial crisis. The Maastricht Treaty thresholds remain unchanged –a maximum deficit of 3% of GDP and a debt benchmark of 60%– but the mechanism for attaining them has changed radically. The nucleus of the new system comprises the medium-term fiscal-structural plans, national documents covering four-to-five years that combine fiscal trajectories, structural reforms and investment priorities. The European Commission draws up benchmark technical trajectories specific to each country, based on a debt sustainability analysis, but the Member States can diverge if they justify their alternatives with well-founded economic arguments. The central operating indicator becomes the net spending pathway –total spending minus interest, programmes paid for by EU funds, the cyclical component of unemployment and one-offs– replacing the previous maze of partly contradictory metrics. The standard period of adjustment is four years but can be extended to up to seven years if the Member State commits to reforms and investments that improve the potential for growth and fiscal sustainability. Seven countries –Austria, Belgium, Finland, France, Italy, Romania and Spain– have requested this extension. The Commission monitors fulfilment using a ‘control account’ that records accumulated discrepancies: if these exceed 0.3% of annual, or 0.6% of accumulated, GDP the Excessive Deficit Procedure may be triggered. Nine countries are currently subject to this procedure: Belgium, France, Hungary, Italy, Malta, Poland, Romania and Slovakia, which were joined by Austria in July 2025. The framework includes escape clauses –one general at the EU level and another national– which allow temporary divergences of up to 1.5% of GDP for a maximum of four years for extraordinary expenditure. In March 2025 the Commission invited Member States to activate the national clause to finance defence spending under the Readiness initiative.
[3] The recent exceptions were the critical moment of the pandemic and Trump’s Liberation Day. In both cases, the bond fell in unison with Wall Street.
