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

How Europe Became an Economic Powerhouse

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

Definition: The European Union (EU) is a unified trade and monetary body of 28 member countries. 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 be drop to 27 when the UK leaves the EU.

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. 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 (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. 

How Is It 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 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 2019. 

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 UK) have declined the Schengen benefits. Four non-EU countries (Iceland, Liechtenstein, Norway, and Switzerland) that 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. (Source: "Schengen Area," European Commission. "Schengen Area Countries List," Schengen Visa Infor.)

The Euro, the Eurozone and the ECB

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. 

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. (Source: "What Is the Euro Area?" European Commission. "The Euro," European Union.)

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%.

This chart shows which countries are members of the EU, the eurozone, and the Schengen area.

CountriesEU MemberSchengenEuro
Austria, Belgium, Estonia, Finland, France, GermanyGreece, Italy, Latvia, Lithuania, Luxembourg,  Malta, Netherlands, Portugal, Slovakia, Slovenia, and SpainYesYesYes
Czech Republic, Denmark, Hungary, Poland, SwedenYesYesNo
IrelandYes No Yes
Bulgaria, Croatia, RomaniaYesPendingNo
Iceland, Liechtenstein, Norway, SwitzerlandNoYesNo
United KingdomExitingNoNo


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 standard 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. 

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. (Source: "The Treaty of Lisbon--Introduction," EU Lex.)


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. They invested $588 billion and employed more than a million people. These companies use it as the gateway to free trade with the EU. Britain's investment in the United States is at the same level. That could impact up to two 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 volatilitygold 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 July 2008, the ECB increased rates to 4.25% to combat 4% inflation caused by high oil prices. The euro strengthened, weakening EU exports. Factory orders plummeted 4.4%, the biggest decrease since 2003. (Source: "Euro-Zone Factory Orders Fall as Outlook Dims," The Wall Street Journal, 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%. But 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%.  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. (Source: ECB Website) For more, see Euro to Dollar Conversion

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

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. The euro's weakness hasn't boosted exports due to lower worldwide demand.