Investors See Few Alternatives to U.S. Treasuries. Could Europe Make One?
As President Trump’s chaotic economic policies provoke questions about U.S. stability, a proposal for European countries to issue joint debt has drawn attention.
For decades, U.S. Treasuries have been at the pinnacle of the global financial system, with investors, governments and central banks steadily acquiring the dollar-denominated debt with the expectation that the U.S. government will never default.
Now the chaotic rollout of President Trump’s economic policies and threat to the Federal Reserve’s independence have provoked questions about the stability of American assets. But investors who want to shift out of Treasuries and dollars face a wasteland of viable alternatives.
Even with the recent uptick in uncertainty caused by Mr. Trump’s policies, few countries have anywhere near the economic, political and legal stability of the United States. The European Union, which as a bloc comes close to America in size and wealth, has a fragmented financial market, with each of its 27 countries selling bonds separately.
Enter “Eurobonds,” a new type of European financial asset proposed by Olivier Blanchard, a former chief economist at the International Monetary Fund who is now a professor at the Massachusetts Institute of Technology, and Ángel Ubide, the head of economic research for global fixed income and macro at Citadel.
The prospect of debt issued by the European Union has been floated in some form for more than a decade, but faced heavy resistance, particularly from countries with strict limits of debt, like Germany. Some of the hurdles were overcome in 2020 when the bloc announced a plan to issue up to 750 billion euros in joint debt to help fund the recovery from the Covid pandemic. But that was a short-term plan.
Mr. Blanchard and Mr. Ubide’s proposal is to regularly issue debt, building a liquid pool of assets, and strengthen Europe’s financial infrastructure. And it’s gaining traction: The chief economist of the European Central Bank recently discussed its merits.
Eshe Nelson spoke to Mr. Ubide about whether Europe could overcome its internal differences and make the plan a reality.
The interview has been edited and condensed for clarity.
Why do you think Europe would be open to this idea now?
There is an urgent need for Europe to achieve strategic autonomy. And for that, you need both military and financial power. And you cannot have financial power unless you have a deep and liquid safe asset that serves as a foundational pillar of the financial sector.
You’ve mentioned to me before that the European Central Bank has also started talking about the international role of the euro. Why does that matter?
There has been an increased use of financial sanctions as a geostrategic tool, which essentially gives most of the power to the United States, because it dominates the global payment system. At the same time, China has also increased the internationalization of the renminbi. I think what the E.C.B. is perceiving is that just staying passive means losing ground from a geostrategic standpoint.
So, what are you proposing?
To replace European countries’ debt, up to the value of 25 percent of their G.D.P. or about €5 trillion, with Eurobonds. We suggest an exchange of current national bonds for Eurobonds and refinancing future maturities that are coming due.
To pay for the debt, countries would allocate a share of their value-added tax [a type of sales tax] receipts for the service of the Eurobonds.
Could a Eurobond really challenge U.S. Treasuries?
It would complement. Global investors are starting to wonder, with all the geopolitical changes, whether it’s a good idea to have another hedging instrument.
What’s stopping this idea from being adopted right away?
Some ask: Is this going to lead to runaway spending and borrowing? And the answer is no. We are simply advocating a change in the funding. We don’t advocate any increase in spending.
The other pushback is: Why should countries like Germany with low funding costs do this? And that’s fair. But you cannot just get better and bigger, and go along with the increase in defense spending and achieving strategic autonomy, without changing something.
Money has been flowing into safe-haven assets like gold and the Swiss franc. Switzerland is actually struggling with the strength of the currency, which is raising questions about whether Europe can absorb a strengthening euro.
All this funding would have to be applied to something. There is plenty of investment that needs to happen in Europe. Can there be a situation, eventually, where there is too much of a good thing? Yes. But that’s a high quality problem to deal with in five or 10 years.