Expanding euro safe assets through joint debt and reforms

Philip R. Lane, Member of the Executive Board of the European Central Bank (ECB), delivered a keynote speech at a joint workshop of the European Systemic Risk Board Advisory Technical Committee and Advisory Scientific Committee on “A European Safe Asset and Financial Stability”.

He highlighted that a safe asset should be highly liquid and act as a hedge during stress episodes. Currently, the euro area faces an undersupply of euro-denominated safe assets, with the Bund serving as the main safe asset, but its stock is insufficient relative to the euro area’s size.

The speech noted that reforms in the euro area, such as banking sector capitalization, the Single Supervisory Mechanism, and the European Stability Mechanism, have increased market resilience, but the overall stock of national bonds remains inadequate for safe asset functions.

The recent ECB EUREP repo facility revisions make euro assets more attractive to global investors by providing liquidity backstops and supporting monetary transmission, especially amid geopolitical fragmentation.

Lane discussed the potential of common bonds backed by EU fiscal capacity, noting their current limited size and liquidity. He presented proposals such as joint borrowing for European public goods and innovative governance models to expand shared debt, including the “blue bond/red bond” approach suggested by Olivier Blanchard and Ángel Ubide, which involves ring-fencing revenue streams to issue common bonds.

The trade-offs of larger blue bond stocks include increased fiscal resource commitments and the need for calibrated issuance levels, such as 25% of GDP, which could require 0.5 to 1% of GDP in tax revenues for servicing.

Another approach discussed is the sovereign bond-backed securities (SBBS) proposal, where intermediaries bundle national bonds into tranched securities, with the senior tranche acting as a safe asset. This method requires sufficient issuance scale to ensure liquidity and safety.

Lane emphasized that expanding euro safe assets depends on political will, mutual trust, and fiscal discipline among Member States, as well as incremental institutional reforms to build consensus and sustainable debt paths.