Strategic autonomy has become Europe’s guiding star in an increasingly fragmented world, nearly a decade after President Macron’s first Sorbonne speech. But what does it take to achieve it? In Allianz Trade’s “Future of Europe” series, which will run over the coming weeks, we examine the reforms, instruments and investments Europe needs—from trade policy to energy security and the role of the euro—to help the continent overcome critical dependencies and vulnerabilities. Today, we focus on eurobonds, which have returned to the agenda amid the need for additional funding for Europe’s defence efforts.
- Capital flows are shifting toward Europe, and euro-denominated bonds are becoming a temporary safe asset.
Global capital is increasingly moving into euro-denominated bonds as the safe-haven status of U.S. Treasuries erodes. Backed by structural strengths, ample balance-sheet capacity and strong financial liquidity (EUR 2trn in excess liquidity versus USD 300bn), Europe has a renewed opportunity to expand the euro’s global role—at a time of rising European investment needs and growing demand for alternatives to the U.S. dollar. Doing so requires increasing the supply of safe collateral by at least EUR 1–3trn by 2035. The best solution is strategic eurobonds covering shared financing needs in defence, climate and infrastructure. Ultimately, a more flexible instrument—EU Jumbos—could reduce institutional and political frictions in a two-speed EU. - Europe’s problem is debt supply, not demand: the benefits of the convenience yield.
The entire pool of European safe assets (EUR 8trn) is equivalent to the stock of U.S. Treasuries held abroad. Allianz Trade’s analysis of the convenience yield shows Europe is leaving substantial, untapped potential on the table when it comes to issuing eurobonds. Eurobonds and highly rated sovereign bonds—especially German Bunds—are complements rather than competitors. For meaningful substitution effects to appear, additional eurobond issuance would need to reach at least EUR 1,000bn. Even then, the effects could be limited, since markets already price in a shared fiscal-risk factor across European government bonds. - Ultimately, eurobonds must become a highly liquid benchmark curve for investors.
We recommend a two-track approach: (i) increase the issuance of very short-maturity eurobonds (EU Bills) to provide safer collateral in global funding markets and support the internationalisation of the euro in digital assets and payment systems; and (ii) add EUR 500bn of long-term, project-specific eurobonds (for defence or climate).
Several European leaders are increasingly advocating expanding joint debt issuance to strengthen strategic autonomy.
Following the Next Generation EU programme (EUR 800bn) created during the Covid-19 crisis, political consensus is emerging among European leaders—from Bundesbank President Nagel and French President Macron to ECB President Lagarde—to extend common debt issuance to strategic areas such as defence and the climate transition.
Indeed, a competitive window for the euro is reopening as Europe’s rising investment needs coincide with growing global demand for safe alternatives to USD assets. A similar episode occurred in the early 2000s, when the U.S. dollar’s share in international foreign debt fell from 60% to 40%, and euro-denominated issuance gained traction. But the reversal after the Global Financial Crisis and the euro crisis showed how quickly such windows can close if the financial ecosystem fails to scale.
For nearly four decades, the U.S. government has been able to monetise its deficits thanks to global demand for safe assets—allowing it to run a “deficit without tears.”
Yet the 2008 subprime crisis exposed fundamental weaknesses and triggered the first serious doubts about the credibility of U.S. institutions and the resilience of the monetary system. To prevent systemic collapse, the Federal Reserve rescued banks and sharply expanded its balance sheet. Foreign financing shifted from private-bank intermediation to direct dependence on Fed-provided liquidity. Banks faced tighter balance-sheet constraints that reduced their capacity to absorb Treasury issuance. As fiscal deficits surged—especially after Covid-19—non-bank actors (e.g., hedge funds) became marginal buyers of U.S. Treasuries, using them as collateral to borrow cash and build leverage. Reliance on highly leveraged intermediaries creates an unstable financial equilibrium. Increased Fed intervention in the repo market highlights growing fragility. The Trump administration’s approach was to stabilise the system by correcting dollar imbalances through tariff threats, U.S. sanctions and, ultimately, the Mar-a-Lago agreement—a tool to pressure foreign investors to continue absorbing U.S. deficits. As political pressure on the Fed rises, concerns about U.S. Treasuries’ “safe asset” status are growing. Investors are beginning to look for alternatives as the global monetary system moves toward a new equilibrium that does not depend solely on U.S. institutional credibility. As a result, foreign investors increasingly view U.S. Treasuries as less attractive (Chart 1). Some have stopped increasing their exposure; others have started seeking returns rather than safety in the United States.
Chart 1: U.S. Treasuries are losing appeal for foreign investors
Sources: LSEG Workspace, Allianz Research
Europe is well positioned as a safe alternative to U.S. dollar assets—but it must expand the pool of safe collateral, which remains scarce and fragmented.
The outstanding stock of A+ or higher rated sovereign and supranational bonds (e.g., EU, ESM, EIB) is only around EUR 8trn—less than the value of U.S. Treasuries currently held outside the United States. Paradoxically, while U.S. debt may now be too large amid renewed domestic focus, the euro area’s supply of high-quality debt remains too limited and fragmented to materially elevate the euro’s status as a global reserve currency (Chart 2).
Chart 2: The euro area’s safe-asset market is undersupplied (outstanding volume/market capitalisation, USD trn)
*Euro area public debt includes Germany, France, Spain, the Netherlands, Belgium, Austria, Finland and Ireland.
**Eurobonds: outstanding volumes of the EU, ESM and EFSF.
Sources: LSEG Workspace, World Gold Council, Allianz Research
Issuing eurobonds as homogeneous safe euro assets is the best way to expand the supply of safe euro assets.
According to Allianz Trade, the benefits of significantly scaling up common borrowing—paired with a stronger international role for the euro in support of strategic autonomy, lower FX risk and lower private and public financing costs—outweigh the risks of moral hazard, weaker competitiveness and a deterioration in the current account balance.
From a temporary safe asset to a strategic global asset
As U.S. Treasuries lose ground as the world’s safe asset, global capital flows appear to be shifting toward Europe.
Several factors point in this direction. First, global shocks such as Covid-19 or “Liberation Day” no longer strengthen the U.S. dollar—instead, they weaken it—reversing the historical “flight-to-quality” pattern. Second, during periods of U.S. liquidity tightening, the euro has often strengthened rather than weakened. This suggests that the liquidity differential between the U.S. and the euro area—well captured by the gap in swap spreads, a proxy for relative debt-supply pressure—has moved in Europe’s favour. Finally, amid higher geopolitical risk—reflected in a rising currency basis (the cost of hedging FX volatility)—euro area government bonds have attracted additional demand. This is visible, for instance, in the 10-year BTP–Bund spread, a gauge of perceived systemic risk in the euro area, which has remained relatively resilient despite global turbulence. Taken together, these signals suggest Europe is becoming an attractive destination for global capital (Chart 3).
Chart 3: The U.S. risk premium is a liquidity impulse for Europe
Sources: LSEG Workspace, Allianz Research
Europe’s relative appeal is rooted in strong structural features—deep and open capital markets, the rule of law and a large single market—and free capital movement, in contrast to China’s capital controls and political uncertainty in the United States.
Europe can offer safe, liquid, legally protected and geopolitically more neutral assets. Liquidity and politics further strengthen Europe’s relative advantage. In the United States, the Fed is forced to support financial liquidity because the private sector’s capacity to absorb Treasury issuance is exhausted. Allianz Trade argues this means global investors increasingly use Europe—especially core markets such as German Bunds—as a global substitute safe asset. Unlike Japan, which is tightening monetary policy and repatriating capital, reducing its presence in global bond markets, Europe has an opportunity to expand its global reach. The euro money market also offers smoother funding than the U.S. market, and euro area excess liquidity remains extremely high. We estimate excess liquidity at more than EUR 2trn (versus only USD 300bn), ready to be mobilised through bill or bond issuance. Europe has the financial liquidity to capture a significant share of safe-haven flows away from U.S. Treasuries. Europe is effectively a temporary safe asset and has the potential to become a global public good that the world is seeking.
The U.S. safe-asset status is being tested, while euro safe assets have room to expand.
Global safe assets trade at higher prices (and therefore lower yields) than debt with comparable risk because they combine stronger safety (credible lender-of-last-resort backing) and liquidity (market depth and collateral usefulness).
This safety-and-liquidity premium—known as the convenience yield—can be substantial. From the 1960s to the late 1990s, the U.S. government benefited from a funding cost discount of around 200 basis points. After the Global Financial Crisis, the U.S. convenience yield declined to 75–50 basis points. Today, the United States has fully exhausted its convenience-yield buffer: it turned negative for the first time in early 2025 and has not recovered since. This illustrates the convenience-yield dilemma: its components—safety and liquidity—move in opposite directions. More debt issuance boosts liquidity (more collateral, a larger market with fewer frictions), but reduces safety. In other words, the liquidity function slopes upward, while the safety function slopes downward. While the safety function is strictly decreasing, the liquidity function reaches a plateau at its extremes (Chart 4). This implies that beyond a certain point, additional issuance no longer increases the liquidity premium at the margin but continues to erode the safety premium. There is an optimal point where maximum issuance meets the minimum safety requirement. The United States has moved past that point, as have France, Japan and the United Kingdom. Germany—and the euro area as a whole—still enjoy a positive convenience yield and therefore have issuance room. If you look only at the convenience yield, it is relatively low but heavily distorted: Germany benefits from an elevated safety premium, while eurobonds suffer from a 50bp liquidity discount. So while the U.S. Treasury has overstretched its liquidity premium, Europe remains overly cautious in issuing eurobonds.
Chart 4: The convenience-yield dilemma—declining safety versus rising liquidity
*Convenience yields estimated as the average of synthetic proxies (swap rates, currency-hedged foreign AAA bonds, AAA/AA corporate bonds adjusted for CDS) and cross-country convenience yields based on a synthetic construction of a constant-currency swap rate using interest-rate swaps and FX swaps data. Safety and liquidity functions are stylised from individual issuer curves. They converge in the middle but may have different slopes at the extremes.
Sources: LSEG Workspace, Allianz Research
For now, there is no yield transfer from Germany to eurobonds
This also explains why eurobonds and German Bunds currently coexist as complementary—not competing—products.
Their convenience yields move together rather than in opposite directions. The reason is structural: eurobonds are safe but lack liquidity, while Bunds combine safety with excellent market liquidity. At current issuance volumes, there is no meaningful transfer of convenience yield from Bunds to eurobonds. Structural differences between German bonds and eurobonds become most visible in crisis episodes. During both the Covid shock and the inflation surge of 2022, Bund convenience yields rose as the flight to safety concentrated in the most liquid available instruments. Eurobonds—despite comparable credit quality—barely reacted because their constraint is liquidity rather than safety (Chart 5). We estimate that to generate meaningful substitution effects in the Bund market, additional eurobond issuance of about EUR 1,000bn would be required. Below that threshold, greater eurobond issuance does not affect Bund yields.
Chart 5: Changes in convenience yields across issuers*
*Convenience yields estimated as the average of synthetic proxies (swap rates, currency-hedged foreign AAA bonds, AAA/AA corporate bonds adjusted for CDS) and cross-country convenience yields based on a synthetic construction of a constant-currency swap rate using interest-rate swaps and FX swaps data.
Sources: LSEG Workspace, Allianz Research
Markets already price a common fiscal-risk factor into European government bonds
European government bonds (EGBs)—especially in Southern Europe—have shown strong convergence since 2022.
The 10-year Italian spread over German Bunds has narrowed from a peak above 250bp to around 60bp today. Spreads for other peripheral issuers such as Spain and Portugal have tightened by roughly 100bp from their 2022 highs. This was closely linked to disbursements from the NGEU fund—especially to Spain, Italy, Greece and Portugal—alongside political stabilisation. We estimate that since 2021, the NGEU growth effect alone amounts to +1.0–1.2pp in total, strengthening fiscal positions. This improvement in fundamentals explains 30–50% of the recent spread compression. Without NGEU, the 10-year spread (vs Bunds) would today be +41bp higher for Italy, +20bp higher for Spain and +35bp higher for Portugal. Put differently, for each percentage point of GDP in NGEU transfers, the 10-year spread (vs Bunds) compressed by 2–5bp. NGEU demonstrated the positive effects of common issuance by distributing European convenience yields more evenly across member states—resulting in a lower overall EGB spread level and less dispersion in European risk premia. Recent EGB spread convergence is therefore also a signal that markets increasingly price this shared risk factor. Markets front-running European institutional progress resembles the spread compression ahead of the euro’s introduction—with the key difference that Europe now has safeguards to avoid fragmentation and systemic redenomination risk. But it also means markets will punish EGB spreads if Europe fails to meet expectations, potentially unwinding part of the NGEU-driven tightening (Chart 6).
Chart 6: 10-year EGB spreads vs Germany (basis points)* — convergence at euro introduction (left) vs NGEU (right)
*Includes: France, Italy, Spain, Portugal, Ireland, Finland, Austria, the Netherlands and Belgium.
Sources: LSEG Workspace, Allianz Research
Turning a window into a structural advantage
The eurobond issuance profile (EU, ESM, EFSF) reflects its origin as a temporary crisis response:
opportunistic issuance at the most sought-after maturities under programmes with implicit or explicit sunset dates. This signalled a lack of commitment, undermining their use as a global benchmark from the outset. As a result, eurobonds still struggle to enter traditional sovereign-bond indices, further hurting liquidity and partly explaining investors’ tendency to hold them to maturity rather than trade them actively. To create a proper eurobond benchmark—also facilitating inclusion in major sovereign-bond indices—issuance policy must shift to a permanent commitment that builds a liquid benchmark curve. Today, outstanding eurobond volumes are compared with the German Bund benchmark curve. In a first step, common issuance should focus on the very short end of the euro yield curve (EU Bills) while opportunistically issuing longer maturities to fund defence and climate programmes (e.g., SAFE bonds for European defence). These instruments likely face the least political resistance because they do not entail permanent fiscal transfers (EU Bills) or they fund widely accepted European public goods. The current eurobond market—mainly supported by Germany, France and Italy—is only about EUR 500bn (versus USD 8trn for U.S. Treasury bills). To be globally meaningful, EU eurobonds should at least double in size. One should also consider that, instead of issuing national bonds, individual debt management offices could issue within an “EU eurobond wrapper,” further increasing EU issuance volumes. For longer maturities, an additional EUR 500bn would be a meaningful step forward. If focused on defence spending needs, joint issuance could even reach EUR 1.8trn during a catch-up phase in 2026–2035.
Creating a European bills market is part of a broader strategy to internationalise the euro and take market share from the U.S. dollar—still dominant, but weakening.
The case for euro internationalisation is compelling in the context of strategic autonomy. Beyond higher seigniorage income, a more international euro would reduce Europe’s structural dependence on U.S. dollar funding. Today, euro area banks raise around 17% of their funding in dollars, and roughly 25% of them do not have enough dollar liquidity to cover that exposure. Shifting more global trade and finance into euros would move FX risk away from European firms, reduce hedging costs and stabilise revenues. It would also strengthen Europe’s geopolitical leverage—enhancing its ability to apply financial sanctions, resist USD pressure (including tariff threats) and reduce exposure to spillovers from U.S. monetary policy. Building a deep offshore euro funding ecosystem is essential to expanding euro usage in global transactions. This aligns with the ECB’s recent announcements to expand the Euro Repo Facility (EUREP), which would give non-euro-area central banks access to euro liquidity against high-quality collateral (sovereigns, eurobonds). Meanwhile, swap-line systems provide foreign institutions with the euros needed to purchase these bonds and manage liquidity. This would bolster Europe’s autonomy by mitigating spillovers if market stress intensifies in the U.S., China or elsewhere. More collateral is needed to scale that autonomy; eurobonds can play a key role if they are treated on par with euro-denominated sovereigns.
Beyond financial stabilisation, swap lines reinforce Europe’s diplomatic alliances with partners seeking protection amid intensifying U.S.–China rivalry.
In this sense, swap lines function as a kind of “financial NATO.” Foreign governments and investors increasingly want to diversify away from strategic pressure exerted by both the United States and China, and toward an economic area still anchored in open markets rather than zero-sum protectionism. This dynamic also underpins Europe’s negotiations with Indo-Pacific partners—echoing ambitions to “build a new trade bloc of 1.5 billion people.” But for Europe to offer a credible alternative, it must provide the financial infrastructure that enables strategic autonomy. The benefits of a more international euro are both financial and geopolitical. Europe would reduce its dependence on U.S. payment, security and technology infrastructure; strengthen export competitiveness; secure imports under EU regulatory standards; and counter the ongoing drift of private capital toward U.S. markets by offering firms deep domestic pools of funding. A final piece of an effective global euro strategy is moving toward a digital euro and a modern mix of public and private money. Blockchain-enabled technologies—central-bank digital currencies and stablecoins—allow near-instant, low-cost currency convertibility without intermediaries. Europe should therefore build stablecoin infrastructure backed by a newly created European bills market that anchors value and can be widely held by the retail sector. In parallel, an ECB-issued e-euro would support wholesale payments, providing safety and stability within and beyond the euro area. This dual system would deliver smooth, reliable funding for all users, strengthen foreign capital inflows, increase the euro’s role in the global monetary system, reduce dependence on U.S. tech platforms and lower transaction costs for businesses and consumers—supporting growth across the Union.
The EU increasingly operates through two-speed integration or enhanced-cooperation mechanisms, such as the proposed “28th regime” for capital markets.
The existing eurobond structure—largely organised through DG BUDG as the EU’s de facto debt management office—may not be flexible enough to match the financing needs of shifting coalitions around strategic goals. A flexible eurobond architecture may therefore be needed to accommodate coalitions of the willing without fragmenting the single market. Germany’s Länder-Jumbo model and the Nordic Investment Bank framework provide a workable blueprint for large-scale eurobond issuance without requiring a full fiscal union or treaty change. Under an EU Jumbo structure, member states would opt into specific issuances on demand, contributing proportionally to finance concrete strategic priorities such as defence procurement, climate infrastructure or energy-transition projects. This variable-geometry approach resolves two key constraints. First, it reflects shifting political priorities: as defence urgency rises or climate imperatives evolve, the creditor coalition adjusts without permanent fiscal commitments. Second, it enables participation by EU member states outside the euro area. Defence and climate spending is largely euro-denominated regardless of domestic currency, and countries such as Poland or Sweden have natural euro demand and would benefit from lower funding costs via joint issuance. Eurobonds would effectively become EU bonds.
The challenge is that EU Jumbo bonds would initially increase complexity in an already fragmented market.
Unlike homogeneous sovereign yield curves, EU Jumbos would initially trade with pricing dispersion between tranches depending on participant composition. But if these instruments receive the same collateral treatment as existing eurobonds and sovereign debt in ECB operations and bank capital frameworks, market acceptance becomes feasible. The core obstacle for eurobonds is volume, not purity. Eurobond markets face a sequencing challenge: scale must come first, then homogeneity can be refined. As issuance grows beyond EUR 1–2trn outstanding, liquidity improves, bid–ask spreads narrow and prices converge toward a GDP-weighted benchmark—a trajectory already visible for eurobonds issued since 2021. Participation by the “big four” (Germany, France, Italy and Spain) in early issuances would be essential for credibility and benchmark formation.
This would mark a cultural shift for national debt management offices accustomed to full issuance autonomy, but it offers more flexibility than a fully federalised parallel eurobond structure.
DMOs retain discretion over participation levels, maturity preferences and thematic choices while gaining access to larger liquidity pools and lower funding costs. For smaller member states that currently pay significant liquidity premia and struggle to maintain primary-dealer networks with limited issuance calendars, an EU Jumbo framework would bring immediate relief—mirroring the logic that led smaller German Länder to create Jumbos. Importantly, this approach does not immediately solve euro area fragmentation: national yield curves would remain alongside EU Jumbos, and the core–periphery spread gap would persist in the near term. But as EU Jumbo volumes grow and market infrastructure deepens, the instrument becomes a structural alternative, gradually redistributing convenience-yield gains and reducing self-reinforcing concentration in German Bunds. This imperfect intermediate solution may be the only politically feasible path toward building a EUR 3–5trn European safe-asset market needed for true reserve-currency status.
[1] Laverriere, P., “The Epistemology of Foreign Dollar Stress: What FIMA and Swap Lines Tell Us about the Nature of Systemic Risk”, 2026.
[2] For a more detailed analysis see: “What to watch: The NGEU fund — the secret behind sovereign spread convergence”, 14 November 2024.
[3] Hildebrand, P., Rey, H. and Schularick, M., “European Defence Governance and Financing”, CEPR, November 2025.
[4] European Banking Authority (EBA), EU-wide stress test, 2025.
