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Investing.com -- Policymakers’ hopes of establishing a new euro “safe asset” are unlikely to be realised in the near term, according to Capital Economics.
While the stock of highly rated bonds from euro-zone governments and EU institutions will grow, the market will remain fragmented and far smaller than its U.S. counterpart.
At current market exchange rates, safe euro assets total just over $9 trillion, or about 50% of the region’s GDP, compared with a U.S. Treasury market worth more than $30 trillion — 108% of U.S. GDP.
Proposals for a new safe asset fall into two broad camps. Risk-sharing options include joint borrowing at the EU level, either to finance projects or replace a share of national government bonds with jointly backed debt.
Non-risk-sharing proposals involve securitising national bonds into new instruments via public or private entities.
While supporters say a new safe asset could advance the Capital Markets Union, boost the euro’s role in global reserves, and lower borrowing costs, Capital Economics views these benefits as “generally overstated.”
The report notes that even if the new asset boosted liquidity, the effect on yields could be limited. Germany’s bond market, for example, is almost €2 trillion larger than that of the Netherlands, yet its 10-year yields are only about 15 basis points lower.
Moreover, if borrowing costs fell sharply across the region, the ECB could tighten policy to offset looser financial conditions.
Consensus on creating such an asset is also lacking. Risk-sharing designs face strong resistance in core countries, while non-risk-sharing plans draw scepticism over financial engineering and potential disruptions to national bond markets.
Even the COVID-19 crisis led to only modest fiscal risk sharing via NGEU, well short of what would be required to rival U.S. Treasuries.
In the meantime, the supply of existing safe euro assets is set to rise. Capital Economics projects bonds rated AA- or higher will grow from €7 trillion in 2024 to about €9.5 trillion by 2030, with ECB quantitative tightening adding roughly €1 trillion.
The EU is expected to issue around €250 billion by 2026 for NGEU projects and up to €150 billion more by 2030 for its Security Action for Europe initiative.
Greater supply may not mean cheaper funding. Bund-OIS spreads widened in 2022 as the ECB began tightening and again in late 2024 after Germany’s coalition government collapsed, raising expectations of looser fiscal rules.
With Capital Economics forecasting larger German deficits and debt than consensus, spreads could climb further. Other “safe” countries may also see yields rise, and some — such as France — could lose their top-tier status if debt dynamics deteriorate.