European Union (EU)

What Is the European Union (EU)?

The European Union (EU) is a political and economic alliance of 27 countries. The EU promotes democratic values in its member nations and is one of the world's most powerful trade blocs. Nineteen of the countries share the euro as their official currency.

The EU grew out of a desire to strengthen economic and political cooperation throughout the continent of Europe in the wake of World War II.

The EU's gross domestic product (GDP) totaled $14.45 trillion euros in 2021. That's about $15.49 trillion dollars. The GDP of the U.S. for the same period was about $23 trillion.

Key Takeaways

  • The European Union (EU) is a political and economic grouping of 27 countries committed to shared democratic values.
  • The euro is the shared official currency of 19 EU members known collectively as the eurozone.
  • In recent years, the EU has expanded to include many of the countries that had been Soviet Socialist States before the collapse of the Soviet Union.
  • In the 2016 referendum known as Brexit, the U.K. voted to leave the EU. It officially left in 2020.

History of the European Union (EU)

The EU traces its roots to the European Coal and Steel Community, which was founded in 1950 and had just six members: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. It became the European Economic Community in 1957 under the Treaty of Rome and subsequently was renamed the European Community (EC).

This served to deepen the integration of the member nations' foreign, security, and internal affairs policies. The EU established a common market the same year to promote the free movement of goods, services, people, and capital across its internal borders.

The EC initially focused on a common agricultural policy and the elimination of customs barriers. Denmark, Ireland, and the U.K. joined in 1973 in the first wave of expansion. Direct elections to the European Parliament began in 1979.

Creation of a Common Market

In 1986, the Single European Act embarked on a six-year plan to create a common European market by harmonizing national regulations.

The Maastricht Treaty took effect in 1993, replacing the EC with the European Union (EU). The euro debuted as a common single currency for participating EU members on Jan. 1, 1999. Denmark and the U.K. negotiated "opt-out" provisions that permitted countries to retain their own currencies if they chose.

Several newer members of the EU have also either not yet met the criteria for adopting the euro or chosen to opt out.

The European Union Map
The European Union Map.  Investopedia

The European Debt Crisis

In the wake of the 2007-2008 global financial crisis, the EU and the European Central Bank struggled to deal with high sovereign debt and sluggish growth in Italy, Spain, Portugal, Ireland, and Greece.

Greece and Ireland received financial bailouts from the EU in 2010 conditioned on the implementation of fiscal austerity measures. Portugal followed in 2011. A second Greek bailout was needed in 2012.

The crisis abated after the European Union and the European Central Bank adopted a series of measures to support the sovereign and banking-sector debt of the affected countries.

Long-Term Measures

These included the establishment in October 2012 of the European Stability Mechanism (ESM), established to assist EU members experiencing severe financial problems, including an inability to access the bond markets. The ESM supplanted the temporary European Financial Stability Facility backstop in place since 2010.

The European Central Bank conducted a series of "targeted longer-term refinancing operations" in 2014, 2016, and 2019 to provide financing on favorable terms for EU financial institutions.

In 2015, the European Union loosened the provisions of the 2011 Stability and Growth Act requiring member states to target public debt of below 60% of gross domestic product and annual government budget deficits below 3% of GDP over the medium term.

The same year, a new EU agency, the Single Resolution Board, assumed responsibility for resolving bank failures in the euro area.

EU's North-South Issues

While the relief measures addressed the crisis, they haven't tackled one of its principal causes—the wide disparity in wealth and economic growth between the European Union's heavily industrialized north and its poorer southern periphery, which remains less urbanized and more dependent on agriculture.

Because the industrialized north and the more rural south share a common currency, struggling southern economies can't take advantage of currency depreciation to improve their international competitiveness. Without currency depreciation, southern exporters ultimately struggle to compete with their northern rivals, which benefit from faster productivity growth.

How It Works in the U.S.

In the U.S., federal transfer payments help to address similar economic disparities between regions and states.

States with higher average incomes tend to contribute a disproportionately large share of federal revenue, while those with lower incomes tend to account for a higher share of federal outlays.

In the European Union, the COVID-19 pandemic prompted joint spending measures some have called "an incomplete and fragile fiscal union in the making."

The Brexit Bomb

After rejecting earlier calls for a popular referendum on the U.K.'s European Union membership, Conservative Prime Minister David Cameron promised a vote in 2013 and scheduled it in 2016. It was a time of growing popularity for the U.K. Independence Party, which opposed European Union membership.

After trailing in late polls, the Leave option won with nearly 52% of the vote on June 23, 2016. Cameron resigned the next day. The U.K. officially left the EU on Jan. 31, 2020.

In July 2020, a report by the Intelligence and Security Committee of the U.K. Parliament noted widespread media reports of Russian efforts on behalf of the Leave option and faulted the government for failing to investigate Russian involvement in British politics.

What Is the Purpose of the European Union?

The European Union was created to bind the nations of Europe closer together for the economic, social, and security welfare of all. It is one of several efforts after World War II to bind together the nations of Europe into a single entity.

How Is the European Union Changing in the 21st Century?

The original members of the European Union were the nations of Western Europe. In the 21st century, the EU has expand membership to the Eastern European nations that emerged after the collapse of the Soviet Union. Its current member nations include Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

Why Was the European Union Created?

The overarching purpose of the European Union, in the years after World War II, was to put an end to the devastating wars that had wracked Europe for centuries. At the same time, it became increasingly clear that a united Europe would have far greater economic and political power than the individual nations in the post-war world.

Article Sources
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  2. Statista. "Gross domestic product of the European Union (EU27) from 1995 to 2021."

  3. UK Parliament. "Brexit Timeline: Events Leading to the UK’s Exit From the European Union."

  4. History. "Europe's Common Market Founded in Major Step Toward Economic Unity."

  5. European Union. "The History of the European Union."

  6. European Union. "Five Things You Need to Know About the Maastricht Treaty."

  7. European Union. "Treaty on European Union," Pages 191 and 194.

  8. Robert Godby. "The European Financial Crisis," Chapter 6. Business Expert Press, 2013.

  9. European Stability Mechanism. "History."

  10. European Central Bank. "Targeted Longer-Term Refinancing Operations (TLTROs)."

  11. Council of the European Union. "Encouraging Structural Reforms and Investment: Flexibility of the Stability and Growth Pact Rules."

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  13. European Commission. "Regions in Europe – 2021 interactive edition: Gross Domestic Product."

  14. Bloomberg. "EU's Productivity Split."

  15. Federal Reserve Bank of San Francisco. "Taxes, Transfers, and State Economic Differences."

  16. Vox EU. "The Emerging Fiscal Union Needs a Solid Foundation."

  17. Bloomberg. "The Roots of Brexit."

  18. Center for Strategic & International Studies. "Did Russia Influence Brexit?"

  19. Intelligence and Security Committee of Parliament. "Russia," Pages10-12.

  20. Britannica. "European Union."

  21. EU Info Centre. "Why Was the EU Created?"

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