The European Union, How It Works, and Its History

How Europe Became an Economic Powerhouse

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Image by Jo Zixuan Zhou © The Balance 2019

The European Union is a unified trade and monetary body of 28 member countries. It 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. The areas that benefit are environmental protection, research and development, and energy.

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


Its 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.

What Countries Are EU Members

The EU's 28 member countries are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, GermanyGreece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. That will drop to 27 after Brexit causes the United Kingdom to leave the EU in 2019.

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 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 October 2019. 


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 eurozone was created in 2005. 

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.

Two EU countries, Ireland and the United Kingdom, have 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 Exiting 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: Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia. 

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, according to estimates by the International Monetary Fund.

But the EU's success is not evenly distributed. Italy, Greece, and Cyprus have high levels of public and private debt, including bad bank loans. Italy also has high unemployment while France suffers from low productivity. Germany has a large trade surplus. Many countries need reforms of their pension systems and labor markets.


Brexit. 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. companies are the largest investors in Great Britain. As of 2016, the U.S. had invested $588 billion in Britain, while British companies employed more than a million people in the States. Britain's investment in the United States is at the same level. That could impact up to 2 million U.S. / U.K. jobs. It's unknown exactly how many are held by U.S. citizens. 

What caused Brexit? Many in the United Kingdom, as in other EU nations, 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. 

Immigration Crisis. In 2015, 1.2 million refugees from Africa and the Middle East poured through Europe's borders. On New Year's Eve 2016, gangs of young refugees across Germany robbed, injured, and sexually assaulted more than 1,200 people, primarily women. 

As a result, many EU countries sealed off their borders. That stranded 8,000 immigrants in Greece. The EU signed an agreement with Turkey to take back refugees who had reached Greece. In return, the EU would pay Turkey 6 billion euros. In the September 2017 election, opposition to the refugees cost Merkel's party its majority in the government. Immigration is the main reason the U.K. majority voted for Brexit.

Greek Debt Crisis. In 2011, Greece's debt crisis threatened the concept of the eurozone itself. It almost 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. 

Article Sources

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  4. Schengen Visa Information. "Schengen Agreement," Accessed Nov. 29, 2019.

  5. Eur-Lex. "The Treaty of Lisbon," Accessed Nov. 29, 2019.

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  7. Reuters. "EU Sees Economic Splits As Half of Member States Face Differing Gaps," Accessed Nov. 29, 2019.

  8. The Washington Post. "‘Brexit’ Could Send Shock Waves Across U.S. and Global Economy," Accessed Nov. 29, 2019.

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