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. 17 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:
Since the current financial and economic crisis began in October 2008, national governments, the European Central Bank (ECB) and the Commission have been working together to:
So far, EU governments have pumped more than €1.6 trillion into the rescue effort.
To preserve the EU's financial stability and resolve tensions in euro area sovereign debt markets, the EU has also set up a safety net for EU members in difficulty: the European Stability Mechanism (ESM) now replaces former temporary tools and is the world's largest international financial institution. Together with contributions from the International Monetary Fund (IMF) it disposes of a financial stability capacity of up to €750 billion. It has become the permanent and integral part of the EU's comprehensive strategy to ensure financial stability in the euro area.
Having the euro as a common currency for a large part of Europe has made it easier for the EU to react to the global credit crunch in a coordinated way and 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.
The euro is used daily by more than 60% of EU citizens. The single currency benefits everybody:
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 two years. Other conditions also have to be met regarding interest rates, budget deficits, inflation rates and the level of government debt.
The ECB not only has the job of keeping prices stable, but also of ensuring 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. In future it will also offer the same advantages for transactions in securities.
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 direct debit payments.
Published in April 2013
This publication is part of the 'European Union explained' series