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A Guide to Europe’s Newest ‘Safe Asset’ and Rival to U.S. Treasuries

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The European Union is issuing bonds like never before. An 800 billion euro ($950 billion) pandemic rescue fund has triggered the biggest-ever splurge in joint borrowing by the bloc’s 27 members. Add to that a 100 billion euro emergency jobs program and the EU is heading toward more than $1 trillion of joint issuance in response to the coronavirus crisis. The hope for some is that these exercises will lead to the creation of regional “safe asset” bonds that could rival U.S. Treasuries -- a goal European policy makers dreamed of even before the common currency was created two decades ago. The rescue fund also stands to propel Europe to the forefront of ESG debt issuance.

Regionally backed debt issuance is exploding. The EU’s 143.8 billion euros of outstanding bonds has more than doubled in size since the summer of 2020 and could still increase by a factor of six or more under the bloc’s four-year funding program. EU-wide securities have the potential to usurp German government bunds as the backbone of the euro area’s credit market and mirror the role played by Treasuries in the dollar debt market. The euro’s standing as a major currency could be boosted, since the mechanisms required to issue joint debt would alleviate longstanding concerns over the bloc’s structural risks and political divides. For some EU countries, a jointly issued asset underwritten by all members may break the so-called doom loop by lowering banks’ exposure to and reliance on debt issued by their own country.