Throughout Europe, a debate is intensifying on whether and how European institutions should issue joint debt to finance joint expenditures. As Europe builds up its security capacity, this discussion has begun to focus on European defence. There is considerable confusion on means and methods to finance such expenditures through Eurobonds, including on what backing such instruments may receive from European sovereigns.
In the short and medium term, the most realistic option is a substantial increase in lending by the European Investment Bank. This financing should be directed towards defence and companies with investment projects enhancing European competitiveness, in line with the broad recommendations of the 2024 report for the European Commission by Mario Draghi, former Italian prime minister. The EIB could finance eligible investment projects predominantly through Eurobond issuance, thereby contributing to a stock of European safe assets that would back Europe’s overall financing capacity.
EIB best placed to channel funds into European competitiveness
I define ‘Eurobonds’ here as debt securities denominated in euros issued by European supranational borrowers, with either robust capitalisation or some form of sovereign guarantee. This differs from the generally accepted definition of bonds issued in a currency other than the issuer’s home currency. Of the existing issuers of such instruments the EIB has the second-largest debt stock, standing at around €450bn, of which 45%-50% is denominated in euro. But it is the best placed to expand this stock with the aim of channelling funds into European competitiveness. The EIB has the lowest spread over German government bonds (Bunds) of any of the four European supranational issuers, and it has been issuing on capital markets since 1959.
The EIB’s debt stock compares with issuance of about €800bn in EU bonds and bills by the European Commission, €95bn from the European Stability Mechanism and €165bn from the related European Financial Stability Facility. Figure 1 provides a breakdown of the different characteristics of these issuers.
Figure 1. Debt-related characteristics of EIB, ESM, EFSF and European Commission
| Dimension | EIB | EU | ESM | EFSF |
| Legal form/ownership | Treaty-based EU bank owned by the 27 EU member states | European Commission borrowing on behalf of the EU | Intergovernmental institution under international law, owned by the 20 euro area member states (Bulgaria has not yet ratified its adhesion) | Luxembourg-law company, legacy euro area crisis vehicle |
| Backing/guarantee mechanism | EIB’s own equity plus uncalled subscribed capital | Direct and unconditional obligation of the EU, backed by the EU budget and, for NGEU, the additional own-resources headroom | Backed by paid-in and callable capital; also benefits from preferred creditor status after the International Monetary Fund | Bonds backed by ‘irrevocable and unconditional’ guarantees of the 17 EFSF member states |
| Capital support relevant to bondholders | Subscribed capital €248.8bn; called capital €22.2bn; implied uncalled subscribed capital €226.6bn | N/A; no paid-in capital structure | Total capital €708.5bn, including nearly €81bn paid-in and around €627.5bn callable capital | Guarantee envelope up to €724.47bn; guaranteed debt issuance limited to €241bn |
| Outstanding debt at end of 2025 | €444bn outstanding borrowings | €800bn total outstanding borrowing | €95bn total outstanding borrowing | €165bn outstanding borrowings |
| Ratings snapshot around end-2025/early-2026 | AAA from Fitch, Moody’s, S&P and Scope | AAA from Fitch, Moody’s, Scope, DBRS and KBRA; AA+ from S&P | AAA/stable from S&P, Moody’s and Fitch; Scope AAA became solicited in 2025 | AA- at S&P in March 2025, A+ at Fitch in September 2025, AAA at DBRS and Moody’s |
| Core policy role | Long-term investment finance for EU policy priorities | Union-level programme finance. | Permanent institution for euro-area crisis prevention and resolution | Legacy runoff funding vehicle for past assistance programmes |
| Risk weighting (Capital Requirements Regulation) | 0% | 0% | 0% | 0%
|
| Liquidity coverage ratio classification | Level 1 | Level 1 | Level 1 | Level 1
|
Source: Author’s compilation based on European Investment Bank, European Commission, European Stability Mechanism and European Financial Stability Facility.
Political opposition to further EU borrowing
The EU is still a long way from reaching a US-style ‘Hamiltonian moment’, as Jacques de Larosière has noted, limiting its ability to act as the common financier of European defence and competitiveness. Moreover, the European Commission may lack the expertise to allocate funding productively and with appropriate standards of accountability and transparency. This was noted by the European Court of Auditors in a critical report on the Covid Recovery Fund in May 2025.
EU borrowing was boosted substantially by the 2020 decision of the European Council to launch Next Generation EU. The centrepiece of this temporary recovery instrument is the Recovery and Resilience Facility. The Commission raises funds from the capital markets, passing them on in grants and loans. The money is pledged towards making economies more sustainable, resilient and prepared for the green and digital transitions, and to address other country-specific recommendations.
Further borrowing at the EU level will be constrained by the realities of the European treaties – and by political opposition, especially in Germany and the Netherlands. In 2022 the Karlsruhe constitutional court in Germany ruled that the NGEU was in line with European treaties. But it underlined that NGEU borrowing should be kept temporary and should be strictly tied to the ‘historically exceptional’ case of the Covid recovery.
Other institutions do not fit the bill
The EFSF is not the appropriate instrument to expand issuance of Eurobonds. It no longer grants new loans or opens new financial assistance programmes, but merely rolls over its existing debt stock with the goal of managing an orderly run-off of its liabilities over time.
The ESM’s core legal purpose is crisis support. It has a large capital and considerable available lending capacity. But its mandate is centred on providing stability support under strict conditionality to member states facing, or threatened by, severe financing problems.
By contrast, the EIB is already financing a large amount of investment projects and expanding its balance sheet. Given the ambitions on enhancing European competitiveness in the Draghi report, these amounts should increase. The EIB has been issuing Eurobonds since the late 1950s for financing investment projects, so such an expansion would be unlikely to lead to problems with the German constitutional court.
As a long-standing trusted issuer on capital markets, and the European supranational with the lowest spread over Bunds, the EIB is best placed to increase the stock of Eurobonds – minimising financing costs, completing capital markets union and helping secure the EU’s future. Politicians around Europe need to grasp the reality of the EIB’s central role – and take steps to expand that further.
Harald Benink is Professor of Banking and Finance at Tilburg University.
This is the second article in a series of different views on European debt. Read the first part here.
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