Title page 1

Contents 2

1. Introduction 3

2. Common debt in the context of fiscal union 4

2.1. Elimination of the bank-sovereign doom loop 5

2.2. Elimination of periphery-to-core runs and the benefits of safe-haven status 6

2.3. Lower borrowing costs 7

2.4. Capital market integration 8

2.5. A greater international role for the euro 8

3. Increasing EU debt within current institutional constraints 8

3.1. Elimination of the bank-sovereign doom loop? 9

3.2. Periphery-to-core runs and safe-haven status? 9

3.3. Lower borrowing costs? 12

3.4. Capital market development? 14

3.5. International role of the euro? 15

4. Replacing a portion of national debt by EU debt 15

4.1. Proposals 15

4.2/4.3. Expected properties 18

4.3/4.4. A trilemma and how to escape it 19

5. Conclusion: how to create an EU-level safe asset, short of full fiscal union 21

References 23

Annex 27

Table 1. Outstanding debt securities 4

Table 2. Balance sheet of the intermediary issuing the European safe asset 17

Figure 1. Reaction 10-year yields to changes in the VIX 7

Figure 2. Reactions of yields to changes in the VIX: EU-level bonds vs. EU sovereign bonds 10

Figure 3. Liquidity indicators of EU-level supranational and EU sovereign bonds 11

Figure 4. Changes in market size and daily trading volumes, 2022-2026 11

Figure 5. Yield differences between EU-level supranational bonds and EU sovereign bonds 12

Table A1. Regression results of yields on ratings, market size, monetary policy and an interaction term of market size and rating category 29

Figure A1. Correlation of daily changes in 10-year yields and US equity prices 27

Figure A2. Correlation of daily changes in 10-year yields and the VIX controlling for interest rate expectations 27

Figure A3. Correlation of daily changes in 10-year yields and the VSTOXX 28

Figure A4. Correlation of daily changes in 10-year yields and the VIX, 2025 28