Europe's Search for a Safe Asset

This Policy Brief surveys and evaluates the recent debate on euro area safe assets by comparing a proposal to create sovereign bond–backed securities (SBBS) with a broad set of alternatives—some with an extensive history, others very recent. It reaches two main conclusions. First, SBBS mostly do not deserve the criticism that they have attracted. Indeed, they do well compared to most alternatives. At the same time, some of these alternatives could be superior in some respects. These include the widely discussed option to issue common euro area bonds financed by member state contributions or a common tax, in addition to less well-known proposals, such as the idea to create a senior, publicly-owned financial intermediary that would issue a euro area bond backed by a diversified portfolio of sovereign debt purchased at face value (“E-bonds”). However, none of the alternatives surveyed in this paper dominates SBBS entirely. Common euro area bonds financed by member state contributions, a common tax, or the proceeds of a sovereign wealth fund would require new revenue commitments, new institutions, or both. E-bonds would require some public money and would lead to some, albeit limited, redistribution across member states. They would also have a greater impact on national bond markets. That said, E-bonds are a serious alternative to SBBS that deserve a more thorough evaluation.