The NextGenerationEU (NGEU) recovery instrument has created a quasi-European safe asset. The European Union (EU) issued common debt to support the post-COVID recovery, albeit on a temporary and limited basis. These bonds have met strong market demand: estimates suggest that demand for NGEU bonds is around twice the volume issued by the European Commission.
NGEU bonds show most of the characteristics of a safe asset: a debt instrument that preserves its value during systemic adverse shocks. Yet, a key issue remains: despite the success of NGEU issuance, the euro still represents only around 20% of global international currency indicators. It is far behind the United States (US) dollar, which represents around 60% of global reserves.
This gap reveals a set of structural tensions: (1) The EU and the US have comparable economic weight, yet their financial roles remain asymmetric; (2) there is a structural gap between the size of the euro area and its institutional incompleteness; (3) contrast remains between the EU’s geopolitical ambitions –willing to strengthen the international role of the euro– and its limited fiscal architecture. 
The idea of a European safe asset regains prominence, as global investors seek alternatives to face the uncertainty surrounding US economic and political policies. Monetary power, however, ultimately depends on the ability to supply a reference safe asset at scale. From this perspective, the euro’s limited role is not a failure of financial engineering but reflects deep fiscal and political constraints. Thus, to what extent does the absence of a harmonised fiscal capacity impede the emergence of a European safe asset, and, consequently, the euro’s ability to act as a global monetary power?
Safe assets shape monetary power (1), yet the EU lacks a coherent and unified bond (2). This gap reflects institutional constraints (3), and as long as fiscal integration is incomplete, solutions remain limited (4).
Safe Assets are the Foundation of Monetary Power
Safe assets play a central role in the architecture of global financial markets. They serve simultaneously as collateral –or guarantee– in repo markets, as reserve assets for central banks, and as reference for the pricing of financial risk. Their availability is a condition for financial stability. On one hand, a shortage of safe assets tends to increase risk to systemic shocks and fragment markets. On the other hand, an abundant supply supports market depth, lower funding costs and overall financial resilience. Concretely, safe assets are a prerequisite for the proper functioning of the financial systems.
US Treasury securities are a good illustration of this role. Since the 1970s, these treasuries have been a key element of the international financial system. In fact, they serve as the primary asset of foreign exchange reserves, as the main form of collateral, and as a global reference for risk pricing. The strength of the dollar rests on the fiscal capacity of the US federal government to produce unified and very liquid, quickly convertible into cash, sovereign bonds. On top of that, US Treasuries act as a bond of last resort in terms of crises. For example, during the COVID crisis, the US Federal Reserve provided dollars to foreign central banks and prevented a global shortage of dollar liquidity. US bonds have a key role in addressing the global shortage of safe assets, thus reinforcing the centrality of the dollar in the international monetary system. For the US, this centrality lowers borrowing costs, sustains strong global demand for its debt, and provides important leverage over international finance.
Thereby, the ability to issue safe assets at scale gives a country direct influence over the global financial conditions. In the absence of a credible safe asset, a currency is unlikely to have more than a regional role. In practice, central banks and investors arbitrate between currencies mostly on this basis, thus explaining the dominance of the dollar despite political uncertainty.
The Euro’s Stuctural Gap
A fragmented safe asset structure
The euro area does not provide a single and unified safe asset. Rather, it’s composed of a fragmented set of national sovereign bonds. In practice, the market resembles a patchwork combining German Bunds, French Obligations Assimilables au Trésor (OAT), Italian Buoni Poliennali del Tesoro (BTP), other sovereign bonds, and a very limited amount of supranational bonds. This fragmentation is particularly visible during periods of crisis: investors in the EU and abroad tend to shift their portfolios toward the safest assets in the EU, primarily German Bunds. This “flight to quality” leads to three consequences: (1) wider spreads between Member States; (2) the creation of a hierarchy of national debts with different risk profiles; and (3) uneven financing conditions across countries, which in turn make monetary policy transmission also uneven.
The German case: a concentrated safe haven
The increased demand for German debt in periods of stress has heterogeneous effects. On the one hand, it may be positive for Germany, as it lowers its borrowing costs, reinforcing its role as the reference issuer for the euro area. On the other hand, because demand is concentrated on a small part of assets, German bond yields can fall to very low levels, reducing returns for investors. Germany’s centralisation of financial stability of the entire euro area makes the whole EU system more dependent on its fiscal credibility, thus reducing the incentive to create a common bond.
Still, even for fiscally strong Member States such as Germany, a common safe asset could bring clear benefits. Reducing the excessive concentration of demand on German Bunds would ease the pressure on the yields, limit the need for repeated European Central Bank (ECB) interventions, and support more balanced growth across the euro area. Over time, a stronger international role for the euro could also reduce the EU’s dependence on the US dollar.
Global attractiveness and partial remedies
At the global level, this fragmentation weakens the euro’s attractiveness. Division leads to a shallower, less liquid market, making it less appealing to international investors and non-EU central banks, which seek large volumes of safe and easily tradable assets. Precisely, a central bank willing to diversify its reserves cannot rely on a single Eurobond comparable to US Treasuries, and must instead choose between multiple national bonds. The stability of the euro area sovereign bonds also often depends on the interventions by the ECB, particularly its asset purchase programmes. In practice, the ECB buys sovereign debt in times of stress to stabilise government bond markets and lower the spreads. This contrasts with the US case, where demand for treasuries remains strong even during crises, even without such a central bank intervention.
The issuance of common debt under NGEU partially addresses this gap by introducing a common borrowing instrument that contributes to the emergence of a more coherent yield curve across Europe. This experience demonstrates the technical feasibility of a common asset. However, the impact remains limited: the volume of NGEU bonds is too small to serve as a global reference and has a temporary nature. This reinforces NGEU’s experimental nature rather than a structural change.
An Institutional Constraint Rather than a Market Failure
A limited legal framework for risk-sharing
Not having a European safe asset is rooted in the legal architecture of the euro area. In particular, the so-called “no bail-out” clause in art. 125 TFEU prohibits Member States from assuming each other’s debts. This constraint has been reinforced by national constitutional constraints, notably in Germany. The Bundesverfassungsgericht –the German Constitutional Court– contested ECB bond-buying programmes, arguing that they may create indirect fiscal transfers between Member States. As a result, supranational instruments are continuously designed to be tightly framed and exceptional, slowing the route to a permanent fiscal union. Even though the actual framework allows limited experimentation –e.g. European Stability Mechanism or NextGenerationEU–, it does not foster the creation of a common safe asset.
The preference for national responsibility
These legal constraints reflect broader political preferences. A coalition of fiscally conservative Member States, namely Austria, Denmark, the Netherlands, and Sweden, consistently prioritise budgetary responsibility over fiscal integration. The 2020 NGEU compromise illustrates this logic: common debt was accepted to be a “one-off” response to an “exceptional” crisis, in exchange for guarantees on strict conditions of use. Moreover, public opinion in several countries remains sceptical regarding a fiscal union, meaning any proposal for a permanent common safe asset faces strong political resistance. The current “unstable” equilibrium thus reflects the choice to preserve fiscal sovereignty even at the cost of fragmentation.
Economic trade-offs
The actual configuration is also characterised by economic considerations. The euro area is characterised by significant differences in debt levels and competitiveness. This raises concerns about “moral hazard” if risks are mutualised. From this perspective, having separate national debts may seem like an option for market discipline. However, this approach has limits. As previously mentioned, fragmentation is amplified in times of crisis, and this requires important ECB interventions.
This observation leads to two distinct interpretations: Is the absence of a common safe asset a market failure producing inefficiency, or is it a rational political choice to avoid the important short-term costs of fiscal federalisation?
Limited Policy Solutions in an Incomplete Union
Common European debt: a structural solution with low political feasibility
A straightforward solution would be to create a permanent European safe asset through common debt, namely “Eurobonds”. Extending debt instruments such as NGEU would, in fact, subsequently create a European Treasury. This could provide a single, large and liquid bond market, comparable to US Treasuries, that would give investors a clear reference in euros. This would also make it easier to finance common priorities, such as defence or the green transition.
However, this requires Member States to permanently share fiscal risks. This means accepting that part of the national debt would be backed collectively. However, as shown in the previous section, this remains legally and politically sensitive. Thus, common debt would surely have the strongest impact, but it also seems like the hardest to implement.
Technical solutions are useful but insufficient
Without political agreement, technical solutions are proposed by the institutions. One option has been to create “synthetic” safe assets, the “ESBies” or European Sovereign Bonds, by pooling national bonds into one, to ultimately issue a safer senior tranche. Therefore, this depends on complex financial mechanisms, and on investors accepting to hold riskier assets from less performing sovereign bonds in parallel to the safer ones. Nevertheless, in a major crisis, this system may not hold, as all the sovereign risks may become correlated.
Another approach relies on the ECB. Through bond acquisition and liquidity position, the so-called Asset Purchase Programme (APP), the ECB can stabilise sovereign markets and lower spreads, thus preventing fragmentation. Though this solution is insufficient, as it depends on uninterrupted central bank intervention without replacing a common safe asset strongly backed by fiscal capacity.
Supporting reforms
Other reforms, such as the Capital Markets Union (CMU), can improve the functioning of financial markets in the EU. In practice, the CMU would permit the alignment of insolvency rules, taxation and financial regulation across Member States. This would allow investors to buy and sell assets more easily across borders, reducing transaction costs and boosting liquidity. However, this doesn’t change the nature of the assets themselves, and investors would still face a choice between different national bonds.
Measures that are politically feasible in the short term seem to have limited structural impact. By contrast, a permanent European safe asset would clearly transform the euro’s international role. However, it requires a harmonised fiscal capacity that remains politically contested. As a result, the euro’s will to serve as an international leading currency depends less on financial innovation than on the willingness of Member States to deepen integration. Without this shift, the euro will remain an important regional currency, but probably not a global monetary power.
