By David Barwick – FRANKFURT (Econostream) – Spain will propose the creation of a European Sovereign Facility (ESF) to centralize part of European Union member states’ debt issuance and build a large common safe asset without increasing aggregate public debt, according to a document seen by Econostream.

The Spanish non-paper, dated July 2026 and expected to be presented by Economy Minister Carlos Cuerpo to the Eurogroup on Thursday, argues that the EU should move from being a supranational issuer to a sovereign-style issuer by using the European Commission to conduct part of member states’ normal funding.

“The Commission would centralize part of Member States’ funding programs and channel the funding obtained with the issuance of EU bonds to participating Member States via loans”, the document says.

Spain proposes that, in the first years, the facility cover around one third of member states’ annual redemptions, as well as the deficit consistent with fiscal plans approved by the Commission. The Commission could also centralize issuance by other European institutions such as the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF), according to the paper.

The proposal is designed to address what Spain sees as the core weakness of the current EU bond market: insufficient scale and uncertainty over future supply. The document says that while the EU has demonstrated its capacity to access markets, outstanding EU bonds amount to only around 4% of EU GDP, while annual issuance is expected to fall from €180 billion in 2026 to around €80 billion annually from 2028.

“In the current context, no single EU sovereign issuer can hope to achieve the status of global safe asset”, the paper says.

Spain argues that if all member states participated and ESM and EFSF issuance were also centralised, the EU could issue up to around €850 billion annually under the facility. Starting from an existing EU bond stock of around €750 billion, this would allow the EU to reach a stock of around €5 trillion within five years, which the paper cites as compatible with safe-asset status.

Participation would be voluntary and could start with a “coalition of the willing”, but the document says at least the five largest Eurozone issuers would need to participate for the initiative to be meaningful. Their participation alone would allow annual issuance of around €540-550 billion, it says.

The Spanish proposal seeks to distinguish itself from traditional eurobond or common-debt proposals by stressing that it would not finance new expenditure or fiscal transfers. Instead, it would reorganize existing national issuance.

“The proposal merely relies on efficiency gains derived from reorganizing debt issuance”, the paper says. “The overall volume of public debt would be unchanged.”

Spain argues that larger and more predictable EU issuance would improve liquidity, facilitate inclusion in sovereign bond indices and raise structural demand. The paper says index inclusion could increase structural demand by around 30%-40%.

Over time, the document says, greater liquidity would be expected to reduce EU funding costs to levels close to, or potentially below, those of Germany, generating savings for participating countries.

Spain estimates that aggregate annual interest savings for EU member states could start at around €5 billion and rise to more than €25 billion in the steady state, once EU issuance reached €5 trillion. The largest savings would be seen in countries contributing most to the facility, such as Italy, France and Spain, or those facing the highest spreads to Germany, including Poland, Romania and Hungary.

To address concerns among lower-yielding countries, the proposal includes a cost-compensation mechanism. Countries with lower borrowing costs than the Commission would pay only their own yield, while any additional cost would be shared among other participants.

The document also seeks to limit moral hazard and adverse selection. Access to the facility would be strictly conditional on compliance with the EU fiscal framework and a credible, financially sustainable debt trajectory. Any fiscal slippages or deficit deviations would have to be financed through national issuance, “presumably at higher cost”, preserving market discipline, according to the paper.

Bonds issued under the facility would carry a dual guarantee: the loan to the participating member state and the EU budget. Spain says the EU budget guarantee would be essential to ensure full fungibility with existing EU bonds and should be included as part of the own-resources ceiling in the upcoming Multiannual Financial Framework.

In the event of a default by a participating country, losses borne by the EU budget could be recovered from EU payments to that member state. Only if these were insufficient would other participating states cover losses, while non-participants would be shielded and would hold a claim on the defaulting member state.

The proposal is likely to be politically sensitive, particularly for fiscally conservative countries wary of any move toward permanent common issuance or contingent joint liability. Spain presents it as fiscally neutral and politically feasible, but the scale of the proposed EU issuance, the role of the EU budget guarantee and the possible loss-sharing among participants are likely to draw scrutiny.

The paper argues that the current global environment, marked by heightened policy uncertainty and signs of structural dollar weakness, gives the EU a chance to strengthen the international role of the euro.

“The EU cannot waste the opportunity to meet the demand of international investors looking to diversify their currency holdings by providing a credible and easily accessible alternative”, the document says.