Eurobonds, but how? Panetta and Blanchard, two similar yet very different proposals

We are back to discussing Eurobonds. The time may not be ripe, but it is propitious. Last week, in his Final Considerations , the Governor of the Bank of Italy Fabio Panetta relaunched the proposal for a “European Pact for Productivity” : the issuance of a common European bond that would have a dual role, on the one hand financing investments for European common goods (technological innovation, energy transition and defense) and on the other constituting the safe asset necessary to develop the European capital market. At the same time, Olivier Blanchard , former chief economist of the IMF, and Ángel Ubide have launched another version of Eurobonds through the Peterson Institute. The two proposals are apparently similar, yet very different.

Blanchard and Ubide start from the assumption that in the current scenario, in which the Trump Administration is questioning the role of the dollar as a reserve currency , the creation of a large European bond market would strengthen Europe's strategic autonomy and allow it to intercept the flow of capital seeking an alternative to American debt after Moody's downgrade and the strange ideas of Trump's advisers on the restructuring of Treasuries . But the European market is too small and fragmented to constitute an alternative to the American bond market. The market for German bunds, the safest European bond, is about a tenth of the size of the US one. And all EU bonds are about a third of the size of German ones: even if European issues were to increase, they would never reach the size necessary to compete with US Treasuries.

Blanchard's proposal to expand this market is to replace a portion of national debts with Eurobonds. This European debt must be sufficiently large and secure, therefore "privileged" compared to national debts. As a guarantee for the Eurobonds, national states should put up a portion of their VAT revenues to pay interest. On this basis, European bonds could be issued (in exchange for national bonds) for 25% of GDP (5 thousand billion euros). The consequence would be the creation of a two-tier debt, one common and 20 national, which in any case should lead to a lower average interest rate for each member compared to the previous one, due to a larger and more efficient market.

Panetta's proposal, on the other hand, is apparently less ambitious. It would simply be a matter of replicating the Next Generation Eu system to finance, as after Covid, investments for "common goods" in areas such as innovation and defense , where all states show they are having difficulties and where it makes sense to reduce asymmetries. Let's take defense spending: Italy has a high debt and is very distant from Russia, while on the contrary the Baltic countries have a low debt but are under direct threat from Putin. In this case it makes perfect sense, to produce a "common good" such as security, to pool guarantees and problems to prevent national interests and selfishness from prevailing.

Panetta, in a speech given in December 2024 , hypothesized financing with eurobonds a quarter of the 800 billion in annual investments indicated by the Draghi Report : together with other existing issues, the common debt would reach 10% of GDP in a few years. The objective of the Productivity Compact would be, in fact, to create a capital market that would lower the cost of debt and increase the productivity of the European economy. On the one hand, public investments would be directed towards strategic objectives of the European Union in a world that is becoming more complicated, on the other, a more efficient capital market could offer better opportunities for hundreds of billions in savings that Europeans invest abroad (mainly in the United States).

The two proposals, apparently similar, are however very different. Not for an economic criterion, but a political one. Blanchard's hypothesis foresees a mutualization of national debt and the establishment of a fiscal union , exactly what the countries of Northern Europe see as a red herring: it is the perfect proposal to be rejected by Germany. It is no coincidence that these are elements that are missing from Panetta's proposal. Indeed, in the launch speech of the European productivity compact he had specified: "It is important to be clear: this proposal does not imply the creation of a fiscal union nor does it require a European finance minister or systematic transfer mechanisms between countries" .

It was not a random premise: it is the political condition necessary to be able to make progress.

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