EU countries coordinate their national economic policies so they can act together when faced with challenges such as economic and financial crises. This coordination has been pushed even further by the 19 countries that have adopted the euro as their currency.
All EU member countries (whether inside or outside the euro) are part of the economic & monetary union (EMU), a framework for economic cooperation designed to promote job creation and sustainable growth, as well as to coordinate our response to global economic and financial challenges.
Since the financial and economic crisis began in October 2008, national governments, the European Central Bank (ECB) and the Commission have been working together to:
To forestall major disruptions to the banking system, a number of EU governments came to the rescue of their banks with urgent support on an unprecedented scale. Between 2008 and 2011, €1.6 trillion - equivalent to 13 % of the EU’s annual GDP - was injected into the system through guarantees, or in the form of direct capital.
To preserve the EU's financial stability and resolve tensions in sovereign debt markets in the euro area, the EU also set up a safety net for euro area members in difficulty: the European Stability Mechanism (ESM). Replacing the temporary tools that had existed before, this is the world's largest multilateral financial institution, with an effective lending capacity of up to €500bn.
Between 2011 and 2013, the EU also introduced new, stronger rules (including an international treaty) to keep a tighter check on public debt and deficits – making sure governments don’t spend beyond their means.
These built on the EU’s main tool for safeguarding economic stability and fiscal discipline, the Stability and Growth Pact (SGP), comprehensively strengthening its application by:
More on the EU's response to the 2008 crisis.
Used by almost 340 million EU citizens, the single currency benefits everybody:
Being in the euro area guarantees stable prices. The ECB sets key interest rates at levels designed to keep inflation close to, but below, 2%. It also manages a portion of the euro area’s foreign exchange reserves and can intervene in foreign exchange markets to influence the exchange rate of the euro.
The combined size and strength of the euro area also creates a stronger and more stable currency that is better able to shield its members from external shocks and currency market turbulence, than individual countries alone could achieve.
All EU countries are expected to adopt the euro when their economies are ready – except Denmark and the UK, who have an official opt-out.
To join the euro area, a country's currency must have had a stable exchange rate for 2 years. There are other strict conditions as regards:
Not only does the ECB keep prices stable, it also ensures that euro transfers to recipients in other euro area countries are as cheap as possible for banks and their customers.
For very large sums of money, the ECB and national central banks operate a real-time payments system known as TARGET2. With the launch of TARGET2-Securities in June 2015, securities transactions within Europe will also be settled (more safely and efficiently) on a single platform operated by the Eurosystem (the central banks of the euro area and the ECB).
The ECB and Commission have also been working to extend the benefits of more efficient and cheaper payments to the whole continent – through a single euro payments area (SEPA).
In practice this means that in 34 European countries all euro payments (bank transfers, direct debit, card, etc.) are treated exactly the same, regardless of whether the payment is between parties in the same or different countries.
Manuscript updated in November 2014
This publication is part of the 'European Union explained' series