Table of Contents
- What Is the European Union (EU)?
- History of the European Union
- Creation of a Common Market
- The European Debt Crisis
- Long-Term Measures
- EU's North-South Issues
- How Region Disparities Are Addressed in the U.S.
- The Brexit Bomb
- What Is the Purpose of the European Union?
- How Is the European Union Changing in the 21st Century?
- Why Was the European Union Created?
- The Bottom Line
What Is the European Union (EU)?
Let me explain what the European Union (EU) really is: it's a political and economic alliance of 27 countries that promotes democratic values among its members and stands as one of the world's most powerful trade blocs. You should know that 19 of these countries share the euro as their official currency.
The EU came about from a strong desire to enhance economic and political cooperation across Europe after the devastation of World War II.
In 2021, its gross domestic product (GDP) reached 14.45 trillion euros, which translates to about US $15.49 trillion. For comparison, the U.S. GDP was around US $23 trillion in the same period.
Key Takeaways
- The 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 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
The EU traces its roots back to the European Coal and Steel Community, founded in 1950 with just six members: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. It evolved into the European Economic Community in 1957 under the Treaty of Rome and was later renamed the European Community (EC).
This development deepened the integration of member nations' foreign, security, and internal affairs policies. In the same year, the EU established a common market to promote the free movement of goods, services, people, and capital across its internal borders.
Initially, the EC focused on a common agricultural policy and eliminating customs barriers. Denmark, Ireland, and the U.K. joined in 1973 as part of the first expansion wave. Direct elections to the European Parliament started in 1979.
Creation of a Common Market
In 1986, the Single European Act launched 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 EU. The euro debuted as a common single currency for participating EU members on January 1, 1999. Denmark and the U.K. negotiated opt-out provisions that allowed them to retain their own currencies if they chose.
Several newer EU members have either not yet met the criteria for adopting the euro or have chosen to opt out.
The European Debt Crisis
Following the 2007-2008 global financial crisis, the EU and the European Central Bank faced challenges dealing with high sovereign debt and sluggish growth in countries like Italy, Spain, Portugal, Ireland, and Greece.
Greece and Ireland received financial bailouts from the EU in 2010, conditioned on implementing fiscal austerity measures. Portugal followed in 2011, and a second bailout for Greece was needed in 2012.
The crisis eased after the EU and the European Central Bank adopted measures to support the sovereign and banking-sector debt of the affected countries.
Long-Term Measures
These measures included establishing the European Stability Mechanism (ESM) in October 2012 to assist EU members facing severe financial problems, such as inability to access bond markets. The ESM replaced the temporary European Financial Stability Facility that had been in place since 2010.
The European Central Bank conducted targeted longer-term refinancing operations in 2014, 2016, and 2019 to provide financing on favorable terms for EU financial institutions.
In 2015, the EU loosened provisions of the 2011 Stability and Growth Act, which requires member states to target public debt below 60% of GDP and annual deficits below 3% of GDP over the medium term.
That same year, the new EU agency, the Single Resolution Board, took responsibility for resolving bank failures in the euro area.
EU's North-South Issues
While the relief measures addressed the immediate crisis, they haven't resolved one of its main causes—the wide disparity in wealth and economic growth between the EU's heavily industrialized north and its poorer southern periphery, which is less urbanized and more dependent on agriculture.
Since the industrialized north and the more rural south share a common currency, struggling southern economies can't use currency depreciation to improve their international competitiveness. Without this option, southern exporters find it hard to compete with northern rivals, who benefit from faster productivity growth.
How Region Disparities Are Addressed in the U.S.
In the U.S., federal transfer payments help address similar economic disparities between regions and states. States with higher average incomes contribute a disproportionately large share of federal revenue, while those with lower incomes account for a higher share of federal outlays.
In the EU, the COVID-19 pandemic led to joint spending measures that some describe as an incomplete and fragile fiscal union in the making.
The Brexit Bomb
After rejecting earlier calls for a referendum on the U.K.'s EU membership, Conservative Prime Minister David Cameron promised a vote in 2013 and scheduled it for 2016, amid rising popularity for the U.K. Independence Party, which opposed EU 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, and the U.K. officially left the EU on January 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 supporting the Leave option and criticized the government for not investigating Russian involvement in British politics.
What Is the Purpose of the European Union?
The European Union was created to bind Europe's nations closer together for their economic, social, and security welfare. It's one of several post-World War II efforts to unite Europe's nations into a single entity.
How Is the European Union Changing in the 21st Century?
The original EU members were from Western Europe. In the 21st century, the EU has expanded to include Eastern European nations that emerged after the Soviet Union's collapse. Current members include Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.
Why Was the European Union Created?
The main purpose of the European Union, in the years after World War II, was to end the devastating wars that had plagued Europe for centuries. At the same time, it became clear that a united Europe would have much greater economic and political power than individual nations in the post-war world.
The Bottom Line
The EU is a powerful alliance of 27 European countries that promotes democratic values among its members. It facilitates political and economic integration throughout the region. Many, though not all, members share the euro as their official currency. Historically, it consisted mainly of Western European nations, but it has expanded to include former socialist states after the USSR's collapse. In 2020, the U.K. officially left the EU.
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