The European Union, How It Works, and Its History

How Europe Became an Economic Powerhouse

A map of Europe with EU member countries in pink. Text reads: "What countries are EU Members?

The Balance / Jo Zixuan Zhou


The European Union is a unified trade and monetary body of 27 member countries. It eliminates all border controls between members. The open border allows the free flow of goods and people. There may be police checks, based on police information and experience, that are not equivalent to border checks.

Any product manufactured in one EU country can be sold to any other member without tariffs or duties. Practitioners of most services, such as law, medicine, tourism, banking, and insurance, can operate a business in all member countries.


The EU's purpose is to be more competitive in the global marketplace. At the same time, it must balance the needs of its independent fiscal and political members.

Its 27 member countries are Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.

How It Is Governed

Three bodies run the EU. The EU Council represents national governments. The Parliament is elected by the people. The European Commission is the EU staff. They make sure all members act consistently in regional, agricultural, and social policies. Contributions of 120 billion euros a year from member states fund the EU.

Here's how the three bodies uphold the laws governing the EU. These are spelled out in a series of treaties and supporting regulations:

  1. The European Commission proposes new legislation. The commissioners serve a five-year term.
  2. The European Parliament gets the first read of all laws the Commission proposes. Its members are elected every five years.
  3. The European Council gets the second read on all laws and can accept the Parliament’s position, thus adopting the law. The council is made up of the Union’s 27 heads of state, plus a president.


The euro is the common currency for the EU area. It is the second most commonly held currency in the world, after the U.S. dollar. It replaced the Italian lira, the French franc, and the German Deutschmark, among others.

The value of the euro is free-floating instead of a fixed exchange rate. As a result, foreign exchange traders determine its value each day. The most widely-watched value is how much the euro's value is compared to the U.S. dollar. The dollar is the unofficial world currency.

The Difference Between the Eurozone and the EU

The eurozone consists of all countries that use the euro. All EU members pledge to convert to the euro, but only 19 have so far. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The European Central Bank is the EU's central bank. It sets monetary policy and manages bank lending rates and foreign exchange reserves. Its target inflation rate is less than 2%.

The Schengen Area

The Schengen Area guarantees free movement to those legally residing within its boundaries. Residents and visitors can cross borders without getting visas or showing their passports.

In total, there are 26 members of the Schengen Area. They are Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland.

One EU country, Ireland has declined the Schengen benefits. Four non-EU countries, Iceland, Liechtenstein, Norway, and Switzerland have adopted the Schengen Agreement. Three territories are special members of the EU and part of the Schengen Area: the Azores, Madeira, and the Canary Islands. Three countries have open borders with the Schengen Area: Monaco, San Marino, and Vatican City.

This chart shows which countries are members of the EU, the eurozone, and the Schengen Area:

Countries EU Member Schengen Euro
Austria, Belgium, Estonia, Finland, France, Germany, Greece, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain Yes Yes Yes
Czech Republic, Denmark, Hungary, Poland, Sweden Yes Yes No
Ireland Yes No Yes
Bulgaria, Croatia, Romania Yes Pending No
Cyprus Yes Pending Yes
Iceland, Liechtenstein, Norway, Switzerland No Yes No
United Kingdom No No No


In 1950, the concept of a European trade area was first established. The European Coal and Steel Community had six founding members: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands.

In 1957, the Treaty of Rome established a common market. It eliminated customs duties in 1968. It put in place standard policies, particularly in trade and agriculture. In 1973, the ECSC added Denmark, Ireland, and the United Kingdom. It created its first Parliament in 1979. Greece joined in 1981, followed by Spain and Portugal in 1986.

In 1993, the Treaty of Maastricht established the European Union common market. Two years later, the EU added Austria, Sweden, and Finland. In 2004, twelve more countries joined: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Bulgaria and Romania joined in 2007.

In 2009, the Treaty of Lisbon increased the powers of the European Parliament. It gave the EU the legal authority to negotiate and sign international treaties. It increased EU powers, border control, immigration, judicial cooperation in civil and criminal matters, and police cooperation. It abandoned the idea of a European Constitution. European law is still established by international treaties. 


The EU's trade structure has propelled it to become the world's second-largest economy after China. In 2018, its gross domestic product was $22 trillion, while China's was $25.3 trillion.

These measurements use purchasing power parity to account for the discrepancy between each country's standard of living. The United States was third, producing $20.5 trillion.

The EU's top three exports in 2018 were petroleum, medication, and automobiles; while its top imports are petroleum, communications equipment, and natural gas.

Its top export partner is the United States and its top import partner is China.