European Union (EU)

What Is the European Union (EU)?

The European Union (EU) is a political and economic grouping of 27 European countries. The EU promotes democratic values 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 international economic and political co-operation on the European continent in the wake of World War II. The European Economic Community, launched in 1957, became the European Union in 1993 with the adoption of the Maastricht Treaty deepening the integration of members' 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 EU's gross domestic product (GDP) totaled $15.3 trillion in 2020, which was $5.7 trillion less than the United States' $21 trillion GDP, according to World Bank figures.

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 euro area or eurozone.
  • In the 2016 'Brexit' referendum, the U.K. voted to leave the EU. The U.K. officially left the EU in 2020.

History of the European Union (EU)

The EU began as 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 the European Community (EC).

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.

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 them to retain their own currencies.

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

European Debt 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 in the wake of the 2007-2008 global financial crisis. Greece and Ireland received financial bailouts from the EU in 2010 conditioned on fiscal austerity. Portugal followed in 2011, along with a second Greek bailout 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.

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 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 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.

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 northern rivals benefiting from faster productivity growth.

In the U.S., federal transfer payments help to address similar economic disparities between regions and states. States with higher average income 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."

Brexit

After rejecting earlier calls for a popular referendum on the U.K.'s European Union membership, Conservative Prime Minister David Cameron promised the referendum in 2013 and scheduled it in 2016 amid growing popularity of 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.

Article Sources

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