Eurobonds: Joint Borrowing, Diffused Responsibility
- Siddharth Kukreja
- 2 days ago
- 4 min read
Macron’s call for joint European Debt brought immediate pushback from Germany. The reasoning is familiar: fears that the German taxpayer will have to pay for the French pensioner. These sentiments are shared by fiscally conservative EU states such as Germany, the Netherlands, Austria and Denmark.
In light of strained ties with the United States, Europe’s interdependence has come into focus, highlighting an emerging need for autonomy. A historical dependence on the United States for security has come into question with Trump’s statements on NATO’s role and the recent weaponisation of tariffs. The numbers speak for themselves - EU defence spending rose by 60% between 2020 and 2025, with plans to mobilise up to €800 billion in the near future as part of ReArm Europe. This autonomy - military but also fiscal - will require further European integration and joint spending, with the Eurobond offering a solution worth consideration.
A "Eurobond", in this context, is a proposed joint debt instrument: eurozone governments would borrow together, with collective backing, at a shared interest rate. This is unlike standard government bonds, where each country borrows independently and pays an interest rate that reflects its own fiscal strength and creditworthiness. Support for a “Eurobond” first emerged as an artefact of the Eurozone debt crisis (controversially referred to as the ‘PIIGS’ crisis). It would allow higher-risk nations to borrow at lower yields, while allowing for a higher yield on national debt. National debt above the thresholds would accurately price a country’s default risk, preserving the incentive for fiscal discipline. It would serve as a highly liquid asset, offering an alternative to U.S. Treasury bonds, and would strengthen the Euro’s role as a global reserve currency.
The time is ripe for such a change, with trust in the United States waning amid geopolitical uncertainties, and a growing need to stimulate the European economy. While Macron’s call was no doubt partly motivated by France’s rising fiscal deficit (5.8% of GDP in 2024) and a ratings downgrade of French debt, the window to act is open – and the architecture will take years to build.
How would it work?
Countless proposals have been put forward on the topic, and the two this article focuses on are a Policy Brief issued by Bruegel in May 2010, which served as a catalyst for debate on this topic, and a proposal in June 2025 by Olivier Blanchard, former IMF chief economist, and Angel Ubide, Head of Economic Research at Citadel.
The first proposal divides government debt into two tranches – a senior Blue tranche and a junior Red tranche, with the senior tranche comprising of a maximum 60% of GDP in national debt for EU countries, and the junior tranche consisting of any national debt above this 60% level. Yield on these senior bonds would then likely be lower than the weighted average of national bond yields. This proposal would lead to a ‘Blue’ bond market, in today’s terms, around four times the size of the German Bund market, and the liquidity premium from the large market size could bring yields close to those of the senior-most national bonds.
While the EU has a no-bailout clause that makes jointly guaranteed bonds impossible, euro-area members still find it cheaper to bail out countries in crisis than to allow a default, which might have systemic consequences – case in point, Greece. Once a country reaches 60% debt-to-GDP, any further borrowing at the junior level incurs a much higher marginal cost, encouraging fiscal discipline.
The obvious question is why the more frugal countries would agree to these bonds, issued at possibly a higher yield than their national bonds with additional default risk. The paper’s answer is that borrowing quotas can be set below 60% for countries with weaker fiscal policy. This would encourage these countries to perform better to access a higher amount of this ‘cheaper’ debt, reducing the risk that these frugal countries will need to ‘foot the bill’. As for the no-bailout clause, the paper states that these blue bonds would be economically feasible, as all EU countries can sustain a 60% debt-to-GDP ratio, with bailouts allowed only for extraordinary circumstances, such as natural disasters, where bailouts are already permitted.
The second paper offers a simpler solution. Without requiring risk sharing or a change to the EU’s fiscal rules, it argues that exchanging national debt for blue bonds at a level as low as 25% of GDP would be enough to create sufficient liquidity in the market, enabling EU bonds to compete with US bonds. This amount would bring the value of EU bonds to $5 trillion, twice that of the German Bund market, which currently offers the clearest alternative to US government debt. This ratio could scale once the initial framework is shown to work, but the authors argue that the 25% alone could be sufficient to push yields below those of the German Bund.
Furthermore, Germany’s latest 10-year Bund auction faced weak demand. Only €3.8 billion out of a total of €5 billion in issuance was placed, at a yield of 2.89%, considerably higher than the 2.73% it achieved in the February auction. This rise in yield, alongside a narrowing of yield spread relative to Italian and French debt, signals a decreased demand and safe-haven premium for the German Bund.
Conclusion
The Eurobond remains contentious – proponents believe it will bring fiscal discipline, opponents believe it will encourage reckless spending and erode fiscal discipline through moral hazard. Europe demands more than political solidarity, and the time is ripe to offer an alternative to US debt as investor confidence wavers. The Eurobond can offer a solution to these problems – and, with a clear framework, can prove beneficial for the entire EU. In the end, the problem is not economic but political, and the danger lies not in joint borrowing but in diffused responsibility.
Comments