It is an illusion to think that Eurobonds will solve all European ills.

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Periodically, Eurobonds – European debt securities – are re-proposed as a panacea for all European problems. This creates a lot of confusion. Eurobonds can serve two main purposes . The first is to raise resources to finance public spending, at a national or European level. The second is to create a financial asset denominated in euros, low risk, liquid and available in sufficient quantities to act as a benchmark for the European financial market, which can compete globally with the dollar. These two objectives require different choices and tools.

The first objective, which aims to expand the capacity to finance common goods such as defense, ecological transition or digitalization, requires the creation of a European budget of considerable size. However, this requires the transfer of decision-making powers from the national to the Community level, which few countries are currently willing to accept. Alternatively, one can follow the example of the Next Generation Eu, which finances national spending programs, such as the PNRR, controlled by the European institutions with common debt. Even in this case, however, fiscal resources must be transferred to the European level, in particular to pay the interest on government bonds. The European Commission has put forward a proposal to increase own resources, in particular through three new revenues (based on corporate taxation and CO2 emissions) to finance the Next Gen Eu, but the European Council has not yet decided. Until the resources are found to guarantee the debt made in the past, it is completely illusory to think that more can be made.

The second reason for issuing Eurobonds is to create a “safe” financial instrument – ​​a so-called safe asset – that would represent the foundation of an integrated European market, alternative to the dollar. This would reduce the risk on all European securities and better protect Europe from external shocks. In this way, the continent’s strategic autonomy would be strengthened. The problem, as ECB President Christine Lagarde recently pointed out, is that Europe has a limited quantity of government bonds considered safe, with a rating equal to or higher than double A (the maximum rating is triple A). European government bonds represent about 50 percent of GDP, compared to more than double for the United States. However, what matters is not only the quantity of safe government bonds. Even when American debt was less than 60 percent of GDP, over twenty-five years ago, dollar-denominated Treasuries represented the world benchmark . Europe’s real problem is the fragmentation of the market. The government bonds of the various countries are illiquid, issued in unconnected ways and at unrelated times and not easily exchangeable. Moreover, a new European spending program, financed with common debt, would not solve the problem of fragmentation.

A new European bond is needed, for at least five thousand billion euros (about a third of the GDP of the euro area). The only way to create it is to issue it to replace part of the existing government bonds issued by member countries. Two economists, Olivier Blanchard and Ángel Ubide, have recently proposed that the European Commission issue new Eurobonds and, with the proceeds of these issues, purchase bonds of member countries on the market . This would not involve transfers of resources between countries because, even in the event of a default of one of them, the European Commission would be protected from any losses, given its status as a privileged creditor. In this case, the cost of a possible default is passed on to the other creditors, which could increase the risk premium on the bonds of some countries.

An alternative solution is for the ESM – the European Stability Mechanism – to issue Eurobonds. The ESM has a large capital endowment – ​​up to over six hundred billion – which would allow it to issue a significant amount of highly rated securities. With the funds raised, the ESM would purchase securities issued by euro area member countries. In the event of an issuer defaulting, the ESM would be recapitalized by that country, which could finance itself directly with a loan from the ESM itself. In order to operate as above, the statutes and functions of the ESM must be revised. This could be an opportunity to break the stalemate that has arisen after the Italian veto on the previous amendment, and to open a new discussion on how this instrument can be put fully at the service of Europe's strategic sovereignty.

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