European Union, explained
Pros and Cons of integration
February 16, 2025
While still among the largest economies, the EU has declined in relative size compared to both US and China in the last decades.
New members experienced strong growth, but many challenges to integration remain.
The European Union is a political and economic union of twenty-seven countries. With 450 million people and a GDP of €17 trillion, it is the world’s largest trade bloc.
The EU has been promoting European integration by creating a common currency (the euro) and a border-free travel area. Not all EU member states are part of both initiatives, but most are.
● EU aims to promote economic growth through the “Four Freedoms”: free movements of (1) people, (2) goods, (3) services and (4) money.
EU citizens who move to another EU country are able to enjoy most of the rights of citizens from those states without needing a visa.
The EU has also sought to create joint policies on the environment, foreign affairs and border controls.
Aim: facing major global issues together.
● Additionally, the EU seeks to be a major player in international affairs.
European integration has also enabled countries with historically bad relations to improve their ties while within the EU.
● At the same time, however, the European Union is facing security challenges, internal divisions on the future of integration, and economic difficulties.
History
1951: In the early years of the Cold War, after two global conflicts in one generation, six Western European countries joined together to form the European Coal and Steel Community.
The goal? To avoid war by making European economies interdependent, and controlling the industries key for war at the time.
The 1950s and 1960s was an era of record economic growth as European countries rebuilt in the aftermath of the Second World War.
● In addition to their postwar recoveries, growing economic and political cooperation helped foster better relations between former enemies, most notably France and West Germany.
In 1993 the Single Market was established.
European single market is an economic space governed under a single set of rules that allows people, goods, services, and capital to cross borders freely.
● By reducing trade barriers, companies are able to do business across borders in a way that is similar to doing business within a single country.
This reduces expenses and allows them to produce and sell in more markets.
1993: The Treaty on European Union formally created the EU as it is known today.
This treaty went beyond simply being an economic agreement and instead also made the EU a political union, also covering areas such as foreign and security policy.
European Union membership is seen as an attractive path towards economic development for countries in Europe.
Some of the key motivations include:
● Access to the Single Market can facilitate growth and investment
● Possibility of receiving EU funds for infrastructure projects and other programmes
Opportunity for their citizens to move for work and study in the rest of the EU
Economic benefits of the EU have enabled many countries, especially in central and eastern Europe, to grow their economies significantly since joining.
The EU has invested billions of dollars in these new member states while their citizens have been able to move abroad and earn higher salaries.
This has created new opportunities for these countries as well as existing members, which now have access to new markets and workers.
● Over half of the GDP growth between 2004 and 2019 in countries that joined the EU in 2004 was due to their joining.
To join the EU countries must meet several requirements and implement reforms.
These include rules on budget deficits, abolishing the death penalty, combating corruption and reforming the judiciary, among others.
Not only do countries want to join the EU but officially the EU also wants to expand.
So far the only country to have withdrawn from the EU is the United Kingdom, which formally left in 2020 as a result of a referendum with 52% support.
How the EU works?
The European Union consists of several institutions. The most important are:
The European Council — consists of the leaders of each EU country, sets general goals for the alliance.
The Council of the European Union — provides an opportunity for ministers in each area (like agriculture or education) to coordinate between member-states.
The European Commission — proposes laws affecting the entire EU to the Parliament, each member sends one commissioner every 5 years.
The European Parliament — elected by the votes of EU citizens, parliament members vote for laws proposed by the Commission.
A major achievement of the European Union has been the creation of a border-free travel area known as Schengen Area:
● Goods can crossnational borders without checks
● Increases travel
● Makes trade easier
● However: Illegal goods or criminals can move between EU states
The Schengen Area combined with free movement of people has made it possible for EU citizens to work, study, and retire in other EU countries.
This has allowed people to find new opportunities as well as for companies to recruit from across the continent.
However, it has also resulted in a brain drain of young and educated people from poorer EU countries to wealthier ones.
Challenges
Joining the European Union does reduce a country’s sovereignty and ability to make its own decisions.
● While national governments can influence EU policies, they sometimes have to accept policies that they oppose.
As a result, EU policies are often the result of compromises.
For example, environmental protection rules may be stricter than some countries want them to be while insufficiently strong for others.
On a number of issues, such as approving a trade deal or accepting a new member state, all member states need to agree.
● Reaching consensus has been especially challenging on some issues such as migration with some countries opposing refugee immigration while others are more supportive.
The EU also lacks enforcement mechanisms for countries that violate rules and agreements.
● Its main tool: withholding funds.
Economic liberalisation and integration has created opportunities for some countries but some of it has come at the expense of other member states.
The entry of poorer countries into the EU has reduced production costs for some goods but this has also meant some citizens in wealthier countries have lost jobs as companies outsource within the EU.
Countries like Ireland and the Netherlands have attracted foreign companies and capital by having very low taxes, which has reduced tax revenues in other EU countries.
· Though support for EU membership remains relatively high on average, opposition to membership, European integration, or the power of the EU has grown in recent years.
“Eurosceptic” parties have seen their popularity increase in response to non-European migration, the effects and handling of the debt and Coronavirus crises, as well as general anti-establishment sentiments.
The fact that European Commission officials are appointed while the European Parliament and other elected institutions have relatively little power has led to European citizens being more disconnected from EU politics.
· Voter turnout at European Parliament elections has been in decline since the first one in 1979.
A central economic problem for the EU is that there is no EU-wide taxation (fiscal policy).
Fiscal policy is the system of collecting taxes and spending this money as government spending.
· This means that while within a country, taxes can be collected to fund support for socially disadvantage groups, there is no
Fiscal policy and monetary policy are crucial instruments for stabilising an economy in crisis.
Monetary policy is the system of controlling how much it costs to borrow money in an economy, by changing interest rates.
The EU only has an integrated monetary policy (the European Central Bank), but not fiscal policy, which limits its ability to respond to crisis within member-states.
The EU’s inability to tax limits its ability to invest or redistribute money across the continent.
EU rules restrict countries’ ability to have large deficits, which otherwise might sometimes be necessary to help stimulate the economy.
EU budget is only 1% of the total size of its economies, and is spent primarily on agricultural subsidies.
Support for the euro currency remains high in eurozone countries but has created problems, including the risk of one country defaulting on its debt or countries having the same exchange rates despite different economic strengths and weaknesses.
Export-oriented and tourism-dependent economies benefit more from having a weak currency exchange rate while those that import more than they export would have more to gain from a stronger euro.
Another issue is that problems vary among countries, complicating policy-making.
Youth unemployment ranged from as low as 6.4% in Germany to as high as 26.6% in Spain, in 2024.
Immigration from outside the EU has also created tensions as poorer, southern member states are the main entry point even though many migrants are hoping to travel to wealthier countries further north.
● As a result, countries like Spain, Italy, and Greece are faced with having to secure the external borders of the European Union while other countries are hesitant to accept migrants.
The European Union also has an ageing population, meaning a shrinking proportion of the population has to support a growing elderly population.
● This has created strains on the labour market as well as welfare and pension policies. The number of workers and those able to pay is falling while those relying on state spending rises.
This has the potential of making the EU less economically competitive.
The EU remains one of the world’s biggest economies and markets.
The EU is able to influence the global economy by mandating regulations in various sectors:
● Companies wishing to operate in the EU have often incorporated changes needed to meet EU standards into their products worldwide.
EU regulation on data privacy has become a model for the world.
It also benefits from having world-leading universities, being a net exporter of manufactured goods, and being the world’s largest trading bloc.
However, the European Union’s share of global GDP has been declining in recent years. Both the US and Chinese economies have overtaken the EU’s as a share of the world economy.
Increasing energy prices as a result of sanctions on Russia along with the threat of tariffs by the United States and importation of subsidised Chinese goods risks harming the EU’s long economic prospects.
The goal of raising the euro to the status of a global reserve currency that can challenge the US dollar has so far failed to come true.
● EU officials have repeatedly stated their desire for the EU to be a geopolitical actor on the same level as the United States and China.
However, disagreements on a range of issues among European countries as well as the EU’s junior role in its relationship with the United States has made this difficult and unlikely.
The United States’ willingness to use sanctions and its economic rivalry with China has forced individual European countries as well as the EU as a whole to choose whether to continue to align economically with Washington or not.
· During the first Trump Administration (2017-2021), the United States unilaterally imposed sanctions on Iran and threatened European countries that continued to do business with the Middle Eastern country.
As a result of the Russian-Ukrainian conflict, EU countries have moved away from Russian gas and increasingly become dependent on US energy exports.
The European Union remains a major economic force in the world with a significant industrial base.
However, with a shrinking workforce and numerous structural challenges, its relative importance in the world has been declining and is likely to continue to do so.
Author Naman Habtom
Editor Anton Kutuzov
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