As the European Union continues to advance the Savings and Investment Union project, creating a true European safe asset becomes increasingly urgent. There are two paths to increase the supply of European safe assets: Europe can either increase collective borrowing, or it can use its existing debt stock in new ways.
From a markets perspective, the best solution would be debt issuance at the European level to finance collective investment in the energy transition, defence and other underfunded European public goods. Such a solution would, over time, expand the stock of safe assets. It would also alleviate the under-provision of European public goods arising when investments with EU-wide benefits depend mainly on national fiscal decisions taken by governments with different degrees of fiscal space.
Collective borrowing or creative repurposing
‘Eurobonds’ is used here to refer to the most mutualised version of a European safe asset: debt jointly issued by European sovereigns, backed by a joint and several guarantee, with sovereigns sharing both proceeds and debt service. Other recent proposals use the term more broadly to describe EU-issued bonds backed merely by national revenue commitments.
This article focuses on a different family of proposals, referred to as euro area sovereign exposure bonds. EASE bonds are safe assets backed by diversified exposures to euro-area sovereign debt, but without large-scale debt mutualisation. We advance two proposals, neither of which is new, but both of which merit renewed attention as policy-makers return to the European safe asset problem.
Two kinds of EASE
Various proposals fit within the confines of EASE bonds. Here, we focus on E-bonds and sovereign bond-backed securities. In the case of E-bonds, a supranational or publicly owned intermediary issues its own debt and uses the proceeds to make senior loans to member states in predetermined proportions. Its assets are therefore senior claims on national sovereigns, while its liabilities are E-bonds held by investors. Safety comes from diversification, the seniority of the intermediary’s claims and any capital or institutional protections, rather than from a joint and several sovereign guarantee.
The SBBS solution reverses the order of seniority and diversification. These are created by pooling euro area government bonds and issuing securities backed by that diversified pool, with the liabilities divided into junior and senior tranches. The senior tranche is intended to be the safe asset, as junior investors would absorb losses first. SBBS could be created by a public institution or by private-sector issuers within a clear regulatory framework.
A principal benefit of EASE solutions, compared with Eurobonds issued only gradually to finance new EU spending, is that European safe asset supply could be scaled up rapidly using the existing stock of sovereign debt. Previous work suggests that EASE bonds could generate a large safe-asset pool. In 2019, both E-bonds and a sufficiently flexible SBBS design were estimated to be able to generate safe assets on the order of €2.5tn. These estimates were based on the stock and distribution of euro area sovereign debt at the time. The volume of outstanding euro area public debt securities has approximately doubled since then, meaning potential volumes are likely to be higher today.
E-bonds versus SBBS
Despite similarities in the quantity of safe assets that could be generated, E-bonds and SBBS differ crucially in that the two designs would affect sovereign borrowing costs differently. Under the E-bond proposal, the remaining national bonds issued to the market would become subordinated to the senior loans from the European intermediary. This would be likely to raise the marginal cost of additional national borrowing, providing an incentive for fiscal discipline.
However, it would not necessarily raise average borrowing costs, because governments would also borrow part of their funding at a lower rate through the E-bond issuer. Recent arguments claim that versions of such a proposal may actually lower total financing costs for most sovereigns, to the extent that the overall European financial system is more secure. Even if the two effects do pull in opposite directions, broad offset is likely, with minimal redistribution across countries.
SBBS would work differently. They would not subordinate national sovereign bonds and are therefore designed not to raise the marginal cost of national issuance, except possibly through liquidity effects if a large share of national bonds is absorbed into SBBS cover pools. Their viability would depend instead on whether both senior and junior tranches can find sufficient demand, including in periods of stress.
The design mechanism also has implications for the tail risk of the instruments. In a severe euro area sovereign crisis, SBBS senior tranches could still be significantly exposed if losses exceeded the protection provided by junior tranches. E-bonds would concentrate risk in a public intermediary, which could be made arbitrarily safe given sufficient capitalisation, although in the worst-case scenario loss allocation could be politically contentious.
There is also a practical difference with political implications. SBBS are closer to a securitisation product, making them potentially harder to explain and regulate. Their success would depend on clear regulatory treatment, positive rating agency assessments of the senior tranche, sufficient demand for both senior and junior tranches and confidence that the scheme would not impair liquidity in underlying sovereign bond markets – not all of which are in policy-makers’ direct control.
The singular EASE bond regulatory proposal to make it into a legislative file at the European level failed to address these concerns. The 2018 Commission SBBS proposal was widely criticised for its failure to address key market design flaws, including ensuring triple-A ratings and providing incentives for market participation. The file, which would have entailed multiple amendments to key components of EU financial regulation, struggled to secure market and political support, ultimately leading to its withdrawal in 2025.
From a regulatory perspective, E-bonds are institutionally simpler, but they depend more visibly on a public European issuer. They have yet to be tested in a Commission regulatory proposal, but if and when they are, the design’s relative simplicity may increase the political sensitivity of the debate around their creation.
This means that neither proposal clearly dominates the other. SBBS are less redistributive and more market-based, but potentially more complex. E-bonds are simpler and may provide a clearer safe asset, but their design must limit hidden redistribution.
Rethinking EASE bond solutions
The regulatory failure of the 2018 SBBS file should not deter policy-makers from revisiting EASE bond solutions. However, it does demonstrate that any such proposal must begin from a thorough analysis of market design principles and engage relevant stakeholders from the earliest stage.
A viable EASE bond solution would need to demonstrate credible ratings treatment, demand-side buy-in and sufficient attention to market stability considerations, both in terms of the liquidity of affected markets and the tail-risk properties of the instrument itself.
EASE bonds are not a substitute for a political decision to undertake common borrowing where collective investment is justified. But Europe’s growing investment, defence and strategic autonomy needs make the shortage of deep and liquid euro-denominated safe assets increasingly important to address.
If designed thoughtfully, EASE bonds could rapidly expand their supply, reduce concentrated sovereign exposures in banks, deepen European capital markets and strengthen the international role of the euro, while avoiding large-scale debt mutualisation. That is enough to justify putting them back on the policy table.
This is the fourth article in a commentary series on European debt. Read the first, second and third parts here.
Álvaro Leandro is an Economist at the Organisation for Economic Co-operation and Development and Conor Perry is a former Economist at OMFIF.
The views expressed are those of the authors and do not necessarily reflect those of any organisation, including the OECD or its member countries.
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