The EU countries coordinate their national economic policies so that they can act together when faced with challenges such as the current economic and financial crisis. 19 countries have pushed coordination even further by adopting the euro as their currency.
All EU countries are part of the economic and monetary union (EMU), the framework for economic cooperation. The joint aims are to:
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 a complete collapse of the banking system, 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 - were 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 has also set up a safety net for euro area members in difficulty: the European Stability Mechanism (ESM). Replacing former temporary tools, this is the world's largest international financial institution. With an effective lending capacity of up to €500 bn, it has become a fixture in the EU's comprehensive strategy to ensure financial stability in the euro area.
For more on the EU's response to the crisis and improved EU management of the euro and Economic and Monetary Union (EMU), see 'The financial and economic crisis'.
Having the euro as a common currency for a large part of Europe has made it easier for the EU to launch a coordinated response to the global credit crunch. It has also provided more stability than would otherwise have been possible. For example, the ECB was able to reduce interest rates for the entire euro area (instead of each country setting its own exchange rate), so banks throughout the EU now have the same conditions for borrowing from and lending money to each other.
Used by over 338.6 million EU citizens, the single currency benefits everybody, as follows:
Being in the euro area is a guarantee of price stability. The ECB sets key interest rates at levels designed to keep euro area inflation below 2% in the medium term. It also manages the EU’s foreign exchange reserves and can intervene in foreign exchange markets to influence the exchange rate of the euro.
EU countries outside the euro area are expected to join, when their economies are ready. The countries that became EU members in 2004, 2007 and 2013 are gradually switching to the euro. Denmark and the UK have stayed outside the euro area under a special political agreement.
To join the euro area, a country's old 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 cross-border euro transfers 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 will also be settled across borders in Europe on a single platform operated by the Eurosystem. Securities settlement will thus become safer and more efficient.
The ECB and the European Commission are working jointly to create a Single Euro Payments Area (SEPA) to extend the benefits of more efficient and cheaper payments. Ultimately all euro payments, however they are made – by bank transfer, direct debit or card – will be treated exactly the same. It will not matter whether the payment is domestic or cross-border. The EU is currently extending the benefits to credit transfers and direct debit payments.
Manuscript updated in March 2014
This publication is part of the 'European Union explained' series