What Is the European Union?

The History of the EU and How It Works

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 most EU members. The open border allows the free flow of goods and people. There may be police checks based on police information and experience, but these 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.

Key Takeaways

  • The European Union is made up of 27 countries and three governing bodies.
  • The EU provides for open borders between its member countries to facilitate trade without tariffs or duties.
  • The Treaty of Maastricht formed the European Union common market in 1993.
  • The EU is the world's third-largest economy after the United States and China.

The Purpose of the EU

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

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 the EU 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 that all members act consistently in regional, agricultural, and social policies. The biggest source of funding for the EU budget is direct contributions by Member States, also known as Gross National Income (GNI)-based contributions.

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

  • The European Commission proposes new legislation. The commissioners serve a five-year term.
  • The European Parliament gets the first read of all laws proposed by the Commission. Its members are elected every five years.
  • The European Council gets the second read on all laws. It 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.

Currency of the EU Area

The euro is the common currency for the EU area. It's 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 a free-floating rather than a fixed exchange rate. Foreign exchange traders determine its value each day as a result. 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 done so as of 2022. 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.

There are 26 members of the Schengen Area in total: 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 have adopted the Schengen Agreement. They are Iceland, Liechtenstein, Norway, and Switzerland. 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

The History of the EU

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

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

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

The Treaty of Lisbon increased the powers of the European Parliament in 2009. 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.


The Treaty of Lisbon abandoned the idea of a European Constitution. European law is still established by international treaties.

The EU Economy

The EU's trade structure has propelled it to become the world's third-largest economy after China and the United States. Its gross domestic product (GDP) was $20 trillion in 2020, while the United States' GDP was $21 trillion. China led the world with a GDP of $24.3 trillion in 2020. These measurements use purchasing power parity to account for the discrepancy between each country's standard of living.

The EU's top three exports were petroleum, medication, and automobiles in 2019. 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.

Frequently Asked Questions (FAQs)

Which country has the largest economy in the European Union?

Germany has the largest economy in the EU as measured by gross domestic product (GDP). Germany's GDP was about $3.85 trillion in 2020, followed by France with $2.63 trillion and Italy with $1.89 trillion.

How many stars are on the European Union flag?

There are 12 stars on the EU flag. The stars represent unity, solidarity, and harmony. The number 12 symbolizes perfection. But the number 12 doesn't directly reference the number of member nations or any other specific grouping of 12.

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