What Is the European Union? How It Works. Its History.

Brexit Threatens 2 Million Jobs and Future of EU

Symbol of the European Union.
Symbol of the European Union.. Photo: Peter Adams/Getty Images

Definition: The European Union, or EU, is a unified monetary body that seeks to balance the needs of its 28 member countries, all of whom are independent fiscal and political entities. It has all the advantages of a large, unified trading area but the disadvantages of political conflict between its members. It tries to overcome this weakness through a series of trade agreements and negotiations. It's known formally as the European Economic and Monetary Union.

How Does It Work?

The EU eliminates all border controls between members. That allows the free flow of goods and people (except for random spot checks for crime and drugs). The EU transmits state-of-the-art technologies to its members in environmental protection, research, and development, and energy.

Public contracts are open to bidders from any member country. Any product legally manufactured in one member country can be sold to any other member without tariffs or duties. Taxes are all standardized. Practitioners of most services (law, medicine, tourism, banking, insurance, etc.) can operate in all member countries. As a result, the cost of airfares, the internet, and phone calls have fallen dramatically. 

News

On June 23, 2016, the United Kingdom voted to leave the European Union . It could take two years to negotiate the terms of the exit. Some EU members asked for an earlier withdrawal. The uncertainty dampened business growth for companies that operate in Europe.

 U.S. businesses are the largest investors in Great Britain. They invested $588 billion and employed more than a million people. These companies use it as the gateway to free trade with the 28 EU nations. Britain's investment in the United States is at the same level. That could impact up to 2 million U.S./British jobs.

It's unknown exactly how many are held by U.S. citizens. (Source: "Brexit Could Send Shock Wave Across U.S. and Global Economy," Washington Post, June 18, 2016.)

The day after the vote, the Dow fell 600 points. The euro fell 2% to $1.11. In the face of so much volatility, gold prices rose 6% from $1,255 to $1,330. 

What caused "Brexit?" Many in the UK, as in other EU nations, are worried about the free movement of immigrants and refugees. They don't like the budgetary constraints and regulations imposed by the EU. They want to enjoy the benefits of free movement of capital and trade, but not the costs. (Source: "What Is Brexit and Why Does It Matter?" The Guardian, June 18, 2016.)

In 2011, the Greece debt crisis threatened the concept of the eurozone. That's because it nearly triggered sovereign debt crises in Portugal, Italy, Ireland, and Spain. EU leaders assured investors that it would stand behind its members' debts. At the same time, they imposed austerity measures to restrain the countries' spending.

They wanted all members to honor the debt limits imposed by the Maastricht Treaty requirements. 

In 2007, the EU became the world's largest economy. Its Gross Domestic Product (GDP) was $14.4 trillion, beating the U.S. GDP of $13.86 trillion. The EU held onto its premier position through the 2008 financial crisis and the eurozone debt crisis. In 2013, the United States briefly regained its leading position. China took over the top spot in 2014.(Source: CIA World Factbook, Rank Order GDP) (Source: CIA World Factbook, Rank Order GDP)

The value of the euro continued to rise until the credit crisis in 2007. At that time, there was a flight to safety to the dollar, which strengthened the dollar. Although the euro is now weaker, exports have not picked up because of lower worldwide demand.

How Is It Governed?

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

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

  1. The EU Council sets the policies and proposes new legislation. The political leadership, or Presidency of the EU, is held by a different leader every six months.
  2. The European Parliament debates and approves the laws proposed by the Council. Its members are elected every five years.
  3. The European Commission staffs and executes the laws. Jean-Claude Juncker is the President until 2019. 

What Countries Are EU Members?

The EU's 28 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, Sweden and the United Kingdom.

The Euro, the Eurozone and the ECB

The euro is the common currency for the EU area, replacing many foreign currencies such as the lira, franc, and Deutsch mark. It is the second most commonly held currency in the world, after the dollar. All EU members pledge to convert to the euro, but only 13 have so far: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, and Spain. These countries make up the euro zone, which was created in 2005.

The European Central Bank (ECB) 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%. In July 2008, the ECB disastrously increased rates to 4.25% to combat 4% inflation thanks to high oil prices. The euro strengthened, weakening EU exports. Factory orders plummeted 4.4%, the biggest decrease since 2003.(Source: WSJ, Euro-Zone Factory Orders Fall as Outlook Dims, July 24, 2008)

The ECB switched to recession-fighting in October, when Lehman Brothers went bankrupt. By May 2009, it had lowered the rate to 1%. However, it began raising rates again too soon. By July 2011, the rate was 1.5%, creating a credit crunch and recession. In December 2011, it lowered the rate back down to 1%. (Source: ECB Website

In March 2015, the ECB began purchasing €60 billion in euro-denominated bonds per month. The launch of Quantitative Easing pushed the euro's value down to $1.06 from $1.20 in January. For more, see Euro to Dollar Conversion

How the EU Was Founded

In 1951, the concept of a European trade area was first established. The European Coal and Steel Community (ECSC) 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 common policies, particularly in trade and agriculture. In 1973, the ECSC added Denmark, Ireland, and the UK. 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: Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia. 

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