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What Is the Euro One Agreement and What Does It Mean for Europe?

In the aftermath of the financial crisis of 2008, European leaders sought to strengthen the economic and monetary union (EMU) that had been established by the Maastricht Treaty in 1992. One of the key proposals was to create a euro area fiscal capacity, which could provide a common budget for investment, stabilization, and convergence purposes. After several rounds of negotiations and compromises, the Euro One Agreement was reached in December 2020, marking a significant milestone in the evolution of the EU.

The Euro One Agreement is a political and legal framework for a euro area budget, which is separate from the EU budget and subject to its own rules, goals, and governance. The purpose of the euro area budget is to support the implementation of the macroeconomic and structural reforms that are necessary for the convergence of the euro area economies and the resilience of the EMU in the face of external pressures and shocks. The budget will consist of both grants and loans, with an initial capacity of around 750 billion euros, financed by joint euro area borrowing.

The Euro One Agreement has several features that reflect the complex balance between the national interests, the EU solidarity, and the economic efficiency. Firstly, the budget will be subject to strict conditionality, meaning that the recipient countries must comply with certain reform commitments and targets in order to access the funds. The conditionality will be assessed by the European Commission, in close cooperation with the Member States and the European Parliament. This provision aims to ensure that the money is used effectively and efficiently, and that the reforms address the structural weaknesses and disparities of the euro area.

Secondly, the Euro One Agreement introduces a new revenue stream for the euro area budget, which will be based on a carbon border adjustment mechanism (CBAM) and a digital levy. The CBAM aims to prevent the carbon leakage, which occurs when companies relocate to countries with lower environmental standards, by imposing a tax on the imported goods based on their carbon content. The digital levy aims to address the challenges of the digitalization of the economy, by establishing a tax on the revenues of large digital companies that operate in the EU but have a low effective tax rate. These revenues will be shared among the euro area countries, according to a formula that reflects their relative contributions.

Thirdly, the Euro One Agreement sets a clear timeline for the revision and evaluation of the budget, which will be conducted every three years, based on the experience and the needs of the euro area. The review will cover the scope, the size, the funding, and the governance of the budget, and will involve the European Parliament, the Council, the Commission, and the national parliaments. This provision aims to ensure that the budget remains responsive and adaptable to the changing economic and political context, and that it enhances the democratic legitimacy and accountability of the euro area governance.

The Euro One Agreement has been praised by many as a historic breakthrough for the EMU, which has traditionally lacked a fiscal capacity and a common policy stance. The agreement has also been criticized by some as a compromise that falls short of the original ambitions, and that leaves many questions unanswered, such as the role of the non-euro area countries, the impact of the CBAM on the global trade, and the compatibility of the digital levy with the international tax rules. However, the Euro One Agreement represents a significant step towards a deeper and more sustainable integration of the euro area, and a more balanced and equitable distribution of the benefits and burdens of the European project.