On June 23, 2016, voters in the United Kingdom elected to terminate their country’s membership in the European Union in a referendum known colloquially as “Brexit.”
The verdict wasn’t decisive. The victorious “Leave” campaign won by a margin of less than 4%, and U.K. Google searches for “what is the EU” and “what is Brexit” peaked in the hours after polls closed, suggesting some voters weren’t clear on the referendum’s ramifications. But Article 50, the European Union charter’s membership termination provision, is clear: Any EU member state can choose to leave the union, and the plurality of voting-age U.K. citizens had voted for their country to do just that.
The victory for the “Leave” campaign launched what can only be described as a contentious divorce between the U.K. and EU. If all goes according to plan, the U.K. will formally leave the EU in March 2019, shrinking the union’s membership by one.
Economists warn that a “hard Brexit” – wherein the U.K. loses access to the single European trading market overnight – could have dire consequences for the country’s economy. Already, global banks and wealth managers are shifting resources from London, whose decade-long finance boom ended abruptly with Brexit, to continental finance centers like Frankfurt, Germany. Ardent “Remain” proponents advocate a do-over referendum that, they hope, will decisively reject Brexit.
But going back on its commitment to leave the EU could harm Britain’s credibility and undercut its reputation as an honest broker, opening a new can of worms. In any case, Britain’s ruling Conservative Party remains steadfast in its support of an on-time Brexit, come what may.
Why Does the European Union Matter?
For non-Europeans, Brexit is mostly an abstract concept, just one source of economic and political instability among many in an increasingly uncertain world. Why should non-Europeans – or, at least, those not planning to emigrate to an EU country anytime soon – care about the EU? Why does it matter that the EU has, in recent years, grown increasingly fractious, dysfunctional, and unstable?
Consider these consequences:
1. Equity Market Turmoil
Equity markets abhor political uncertainty. On the trading day following the Brexit referendum, for instance, the Dow Jones Industrial Average dropped more than 600 points. Though markets may recover in the temporary absence of bad news, periodic geopolitical shocks aren’t good for nervous investors.
2. Stronger U.S. Dollar
Political uncertainty in Europe and the U.K. depresses the euro and pound relative to the U.S. dollar, which investors continue to regard as a safe haven. A strong dollar is bad news for U.S. exporters, whose goods are more expensive to customers holding weaker currencies – and, it follows, bad news for the U.S. economy at large. On the other hand, a weaker pound is good news for flush U.S. companies looking to snap up struggling British competitors, according to The Guardian.
3. Protectionist Economic Policy
Many EU member states are grappling with increasingly assertive nationalist parties advocating for protectionist labor and trade policies (more on that later). While individual policy proposals should be judged on their merits, protectionism generally isn’t good for international firms whose business models favor free trade.
4. Uncertainty or Disruption for U.S. Companies Doing Business in the EU
Many U.S.-based companies have significant operations in the U.K. As Britain’s exit looms, some are downsizing or relocating these operations altogether; Ready for Brexit has more on multinationals’ rush to set up shop in continental Europe. Though perhaps necessary in the long run, these moves are costly and disruptive in the near term.
What Is the European Union?
To understand why Britons’ decision to sever ties with the EU was so momentous, we must first understand the European Union’s origins, structure, and purpose, along with the challenges and opportunities facing the soon-to-be-27-member bloc. Here’s what you need to know about the EU bloc’s origins and membership.
Origins of the European Union
The seeds of the European Union were sown in the ashes of World War II, which devastated much of Western Europe and set the continent’s economy back decades.
The European Coal & Steel Community (ECSC)
The first milestone came in 1951 with the creation of the European Coal and Steel Community (ECSC), a unified market for French and West German coal and steel. The ECSC soon admitted Italy, Belgium, the Netherlands, and Luxembourg, forging a single coal and steel market that stretched from Sicily to the North Sea.
ECSC member states agreed to submit to the jurisdiction of transnational supervisory bodies, including a newly created executive council and a special legal court. Like the ECSC’s economic domain, these bodies’ shared mandate was modest, but they nevertheless set in motion a project of economic and political cooperation that would define Europe in the decades to come.
The European Economic Community (EEC)
The six ECSC nations took the next step toward economic unification in 1957 with the signing of the Treaty of Rome. This treaty laid out the framework for the European Economic Community (EEC), envisioned by its founders as a regional free trade zone with no internal trade barriers and common external trade policies. The EEC was formed on January 1, 1958, beginning the long process of trade liberalization among its six founding members.
By 1967, this process was far enough along to eliminate the need for the ECSC and the European Atomic Energy Community, a common nuclear energy market. Both merged with the EEC that year, forming a unified transnational framework with one parliament and court system.
The EEC grew steadily through the 1970s and 1980s. In 1973, Ireland, the U.K., and Denmark joined; in 1981, Greece; in 1986, Spain and Portugal; and in 1990, a reunified Germany. All new members agreed to relax internal trade barriers and normalize external trade policy after joining. By the early 1990s, the unified economic market stretched from Lisbon, Portugal in the west to Athens, Greece in the east to Aberdeen, Scotland and Copenhagen, Denmark in the north.
The Dawn of the European Union
As the EEC’s membership grew, so did its ambitions. In 1993, the EEC changed its name to simply “EC” for “European Community.” That year, EC member states took the next major step toward a stronger, more integrated union with the enactment of the Treaty of Maastricht, a framework for closer political, economic, and security cooperation within the common market.
The Treaty of Maastricht, also known as the Treaty on European Union, set forth the basic framework that governs the modern EU. The treaty’s provisions included:
- The basis for a regional currency (the euro)
- The economic and government finance criteria (the Maastricht criteria) required of any nation that wished to join the regional currency
- A regional central bank (the European Central Bank) with a unified monetary policy
- A new concept of European citizenship premised on unfettered freedom of movement between EU member nations.
Future treaties – notably, the Treaty of Amsterdam (1997), Treaty of Nice (2001), and Treaty of Lisbon (2007) – clarified and amended aspects of the Maastricht framework. Among other things, these updates centralized and strengthened legislative and judicial power in Brussels, the EU capital; took further steps toward a common defense policy; and set forth an orderly procedure by which EU member states could leave the union.
European Union Members
As of early 2019, the European Union has 28 member countries, 19 of which use the euro. Three non-member nations – Iceland, Norway, and Liechtenstein – belong to the European Economic Area (EEA), an extension of the EU’s single market.
The European Union’s member states and their dates of admission are:
- Austria (1995)
- Belgium (1958)
- Bulgaria (2007)
- Croatia (2013)
- Cyprus (2008)
- Czechia, formerly the Czech Republic (2004)
- Denmark (1973)
- Estonia (2004)
- Finland (1995)
- France (1958)
- Germany (1958)
- Greece (1981)
- Hungary (2004)
- Ireland (1973)
- Italy (1958)
- Latvia (2004)
- Lithuania (2004)
- Luxembourg (1958)
- Malta (2004)
- The Netherlands (1958)
- Poland (2004)
- Portugal (1986)
- Romania (2007)
- Slovakia (2004)
- Slovenia (2004)
- Spain (1986)
- Sweden (1995)
- United Kingdom (1973), expected to leave the EU in 2019
The Treaty of Maastricht set forth the terms under which a future regional currency zone – the euro currency zone, or eurozone – would operate. Today, the euro is the world’s second-most widely held currency and the principal rival to the U.S. dollar. Both currencies have floating exchange rates, meaning their relative values change on a daily basis. Since much of the world’s foreign reserves are held in one currency or the other, the U.S. dollar and euro are arguably the planet’s most significant currency pair.
According to the European Central Bank (ECB), the eurozone developed in three stages following the ratification of the Treaty of Maastricht:
- July 1990 to December 1993: Free movement of capital was established between the future founding members of the eurozone.
- January 1994 to December 1998: Future member states developed central banking and economic policy.
- January 1999 Onward: The euro debuted in global electronic currency markets in January 1999. Physical currency debuted in January 2002, and complete de-circulation of national currencies was achieved by March 2002. The European Central Bank implemented a unified monetary policy for the entire eurozone.
Since Maastricht, three additional mechanisms have arisen to shape and stabilize national and regional economic and fiscal policies within the eurozone:
- The Stability and Growth Pact, which ensures that eurozone members adhere to sound budgetary policy
- The European Stability Mechanism (ESM), which provides financial support to eurozone countries experiencing fiscal problems
- The Single Supervisory Mechanism and Single Resolution Board, which help stabilize the eurozone’s banking system in periods of fiscal crisis
The euro currency zone, or eurozone, has 19 EU members:
Hungary, Poland, and Czechia are in various stages of preparation to adopt the euro. Sweden and Romania have committed to adopting the euro in principle, but the timetable is unclear in both cases.
With exceptions for “exceptional and temporary” excesses, prospective eurozone member states’ fiscal policies must accommodate the four Maastricht criteria:
- Rates of inflation may exceed the average of the three best-performing member states by no more than 1.5%.
- Public debt may not exceed 60% of gross domestic product (GDP), and the annual public deficit may not exceed 3% of GDP.
- National currencies must be fixed to the euro for two years before adopting the euro. Member states must not intentionally devalue their currencies.
- Long-term interest rates must be no more than 2% higher than the average of the three best-performing member states.
The Schengen Area
The Schengen Area is a 26-state region without border or passport controls. Originally proposed in 1985 outside the EC framework, the zone was formally established in 1995 and incorporated into the EU framework with the ratification of the Treaty of Amsterdam in 1997.
The Schengen Area is not exactly equivalent to the European Union. The U.K., Ireland, Bulgaria, Romania, Cyprus, and Croatia all have some border controls; non-EU members Switzerland, Norway, Iceland, and Liechtenstein – as well as tiny city-states Monaco, San Marino, and Vatican City – are formal or de facto Schengen states.
According to a 2008 European Commission publication about the Schengen Area, the region has more than 400 million inhabitants, nearly 2 million of whom commute across national borders each day. A European Parliament report states that the total value of intra-European trade, including cross-border trade that would normally be slowed by border controls, exceeded 5 trillion euros in 2014. The same report pegged the direct annual cost of restoring intra-Schengen border controls at 5 billion to 18 billion euros.
Non-EU citizens have freedom of movement throughout the Schengen Area. Once an outside visitor to Europe receives an entry visa or passport stamp at their point of entry to the region – for instance, an international airport – they can move without restriction between Schengen countries for up to 90 days. The EU allows visa-free entry from most developed nations; Schengen Visa Info has a list of countries whose nationals require a single “Schengen Visa” to enter the Schengen Area.
The European Union’s Mission & Governance
EU member states are bound by shared purpose and values, clear political structures, and obligations and rights spelled out in the union’s charter.
Values & Goals of the EU
The European Union Charter of Fundamental Rights spells out six values and eight goals that inform the region’s governance. The values are:
- Human Dignity. The charter views this as the basis for all other fundamental rights.
- Freedom. This is a broad-based concept of freedom that incorporates freedom of individual privacy, thought, religion, expression, assembly, and information.
- Representative Democracy. All EU citizens are permitted to vote in and stand as candidates in elections for European Parliament and representative bodies and institutions in their home countries.
- Equality. All citizens are considered equal under the law.
- Rule of Law. The European Court of Justice holds final jurisdiction over national and sub-national courts within the EU.
- Human Rights. The charter defines these as freedom from discrimination on the basis of sex and other protected statuses, the right to protection of personal data, and the right to access to justice.
The union’s goals include lofty ideals like promoting peace and enhancing “cohesion and solidarity” among EU member states.
Governing Bodies of the EU
To outsiders, the warren of executive, legislative, and judicial bodies governing the European Union is confusing, even inscrutable. What follows is a non-exhaustive accounting of the most important of these bodies.
The European Council is a non-legislative political body responsible for setting the agenda for the EU’s governing apparatus and proposing the laws the European Parliament may debate and enact. Led by a rotating president and composed mainly of member nation heads of state, the European Council has no power to pass or change laws directly.
The EU has three main legislative bodies:
- The European Parliament, whose 751 members are elected directly by EU citizens to represent their interests
- The Council of the European Union, a non-elected body that represents the interests of EU member governments and has the power to compel national legislatures and agencies to act
- The European Commission, a hybrid body charged with proposing new legislation and enforcing laws passed by other EU legislative bodies
The EU has two main judicial bodies:
- The Court of Justice of the European Union, the union’s supreme judicial body (akin to the U.S. Supreme Court), whose 56 judges ensure that EU laws are applied equally in all member states
- The Court of Auditors, a non-enforcement body that operates as the external financial auditor for the EU’s governing apparatus and as EU citizens’ de facto taxpayer advocate
Other EU Bodies
The EU’s governance apparatus includes dozens of other entities of various size and import, including:
- The European Central Bank (ECB), which sets a unified monetary policy for the union
- The European External Action Service, which coordinates member states’ foreign policy
- The European Investment Bank, which directs large-scale EU investment projects and provides loans and other forms of financial assistance to small businesses
- The European Data Protection Supervisor, which enforces EU data protection laws
- The European Committee of the Regions, which represents the interests of member states’ regional and local governments
Criticism of the EU Model
Even the EU’s most ardent boosters admit that the union has some flaws. While subjective opinions of the EU often turn on political philosophy, the following three criticisms are difficult to deny.
1. Democratic Deficit
Though perceptions vary by country, EU citizens generally have unfavorable views of the EU’s governing institutions.
This is due in part to the perception that ostensibly representative bodies like the European Parliament are not responsive to – or have little power to address – their constituents’ needs. These weak democratic institutions contrast sharply with an unelected European bureaucracy that’s widely seen to wield immense influence over EU citizens’ private and public lives.
It’s a fundamental weakness that’s likely to be remedied only with significant structural reforms that strengthen the EU’s democratic institutions – and, as Joseph C. Sternberg of The Wall Street Journal advocates, perhaps creating an executive branch in the mold of the U.S. presidency.
2. Brain Drain in Peripheral EU Countries
Free movement within the Schengen Area has been a godsend for talented Eastern European youths facing uncertain prospects close to home. With relative ease, Bulgarian lawyers and Polish physicians can relocate to dynamic western capitals like London and Berlin, where they’re likely to find better, higher-paying jobs.
Things aren’t so rosy for the communities they leave behind. As The Economist notes, origin countries face labor and talent shortages; one survey found that up to 90% of Bulgarian medical students planned to emigrate after graduation.
3. Monetary Policy Unsuited to the Periphery
The European Central Bank’s deflationary monetary policy is widely seen as biased toward the bloc’s northern “core,” whose members typically have manageable sovereign debt and low budget deficits relative to GDP. Debt-laden peripheral economies like Greece and Portugal would benefit from a more accommodating, inflationary approach. Economists attribute the Greek debt crisis, described in greater detail below, to a deflationary or “hawkish” monetary policy, at least in part.
The European Union Today: Challenges & Possibilities
The recent history of the European Union has been fraught. Since 2000, the bloc has faced a slew of challenges, many of which continue today. These are among the most significant:
Efforts to Admit New Members
Under Article 49 of the Treaty of Maastricht, any European nation that commits to upholding the EU’s six fundamental values is eligible to join the union. The formal basis for a country’s accession to the EU is spelled out in the Copenhagen criteria:
- Stable political institutions that guarantee representative democracy, human rights, rule of law, and respect for the protection of minorities
- A stable, market-based economy resilient enough to withstand market pressures within the EU
- The capacity to implement and respect the supremacy of EU law and to remain in alignment with the aims of the EU’s economic, political, and monetary union
For countries without longstanding traditions of political and economic liberalism, meeting the Copenhagen criteria is easier said than done. Croatia, the newest EU member state and one of several former Soviet states now in the union, acceded in 2013. No further additions are expected until at least 2025, when Serbia and Montenegro may join. Though Turkey has been the subject of accession negotiations since at least 2005, its accelerating turn toward authoritarianism directly conflicts with the first Copenhagen criterion and makes accession unlikely in the near term.
Looking ahead, it’s clear that the EU’s fastest growth is behind it. The countries remaining within the union’s plausible geographic extent are either unlikely to meet the Copenhagen criteria anytime soon (this includes most non-member Balkans and Eastern European nations) or unlikely to accede for political reasons (polls and referenda reveal deep euroskepticism among majorities in Iceland, Norway, and Switzerland).
The Global Financial Crisis
The global financial crisis of the late 2000s precipitated an extended period of slow or negative economic growth whose ramifications continue to be felt today.
The EU’s post-crisis recession wasn’t as long or deep as the United States’, thanks in part to the aggressive application of fiscal controls such as the European Stability Mechanism. According to Kalin Anev Janse, Secretary General of the ESM, countries that received support from the ESM, such as Spain and Ireland, are among the region’s fastest-growing national economies today.
In the aftermath of the financial crisis, the EU deployed new financial controls designed to reduce future crises’ severity and disruptiveness. The Single Supervisory Mechanism governs more than 100 major European banks whose failure or impairment would threaten the monetary union’s stability; the Single Resolution Board provides for the orderly dissolution of failed European banks.
The Greek Debt Crisis
Unlike the United States, Europe experienced a second period of flat or declining economic growth in the early 2010s. Many economists blamed the ECB’s insistence on normalizing eurozone interest rates in defiance of lingering economic weakness. National debt crises on the eurozone’s economic periphery, most notably in Greece, also contributed to the slowdown.
Greece’s sovereign debt increased from 103.6% of GDP in 2006 to 178.9% of GDP in 2014, per Eurostat. The increase – over levels that were already technically impermissible under the Maastricht criteria – caused Greek government bond yields to spike from historic levels near 5% in 2009 to nearly 30% in 2011 and 2012, spooking investors and threatening to precipitate similar crises in other debt-laden eurozone economies. The crisis forced the Greek government to enact painful budget cuts and tax increases that deepened the country’s economic malaise, negotiate a 50% reduction in repayments to bond investors, and accept three bailouts from supranational financial stability bodies – most notably, an International Monetary Fund loan that later briefly fell into arrears.
Though the crisis’s acute phase is past, Greece continues to modify its obligations to bondholders. According to Bloomberg, the country’s European bondholders agreed in August 2018 to a 10-year extension of maturities on about $112 billion in bailout funds. Moreover, the conditions that precipitated the crisis – namely, the fact that debt-laden countries such as Greece coexist within the same monetary union as fiscally fastidious countries like Germany – remain in place.
According to a 2017 European Commission report on intra-EU labor mobility, nearly 12 million working-age EU citizens – about 4% of the bloc’s total working-age population – lived in a member state other than their country of origin. Four countries accounted for approximately half of all EU “movers”: Italy, Poland, Portugal, and Romania. Just two, Germany and the U.K., drew about 50% of all movers.
Intra-EU migration – specifically, migration of labor from peripheral eastern and southern European countries to northern and western states with strong labor markets – has fueled resurgent populist movements in some destination countries. During the Brexit campaign, for instance, “Leave” proponents pushed the offensive “Polish plumber” meme to galvanize support for tighter passport controls, a key plank in their platform.
Transcontinental Migration & the Refugee Crisis
Europe has long been a destination for migrants from Africa and Asia, but recent history has sorely tested the continent’s willingness to accept refugees fleeing war, famine, and economic strife. In 2015, according to the European Commission, more than 1 million people traveled to the EU from points south and east. Many endured perilous Mediterranean crossings in rickety, overladen boats; others chanced arduous overland journeys through scorching scrubland and rugged mountains.
To combat the crisis, the EU committed to investing billions of euros in humanitarian aid to transit and origin countries throughout the developing world. The lion’s share of this commitment – some 3 billion euros – went to Turkey, a major transit country for refugees fleeing the Syrian civil war.
The migrant influx is a major source of social and political tension in destination countries. After arguing for years that Germany had a moral imperative to accept refugees fleeing war and famine, German Chancellor Angela Merkel acquiesced to her country’s increasingly strident political opposition and agreed in late 2017 to limit annual refugee admissions. In July 2018, she and her conservative coalition partner reached a compromise to reinstitute some border controls on Germany’s southern fringe, where most non-EU migrants enter.
Though other Schengen countries had previously instituted limited border controls to manage migrant flows, the symbolism of the EU’s largest economy and most ardent champion doing so wasn’t lost on outside observers – nor Merkel’s political opposition. In October 2018, Merkel all but admitted that her political capital was spent when she announced that her present term as Chancellor would be her last.
Contentious Relations With Russia
In the late 20th century, the EU and its predecessors – then far smaller in extent – were de facto economic and ideological counterweights to the Soviet Union and its Eastern European satellite states.
Today, Russia has a market-based economy and goes through the motions of representative democracy. To varying degrees, most of its former satellites embrace these Western ideals as well. Indeed, many newer EU members are former Soviet bloc countries: Czechia, Slovakia, Slovenia, Croatia, Romania, Bulgaria, Poland, and the three Baltic states.
Per the European External Action Service, the EU and Russian governments cooperate within the partnership and cooperation agreement (PCA) framework on matters such as trade, environmental policy, regional security, and education. Given their geographical proximity, Russia and the EU are economically dependent as well. The EU is a major export market for Russian oil and gas, and Russia, in turn, buys everything from vehicles and machinery to pharmaceutical products from EU manufacturers.
Moreover, wealthy Russian oligarchs see the EU, and particularly the U.K., as a safe place to stash capital beyond the reach of a capricious central government; London’s high-end real estate market is supported in significant part by foreign investment.
Lately, relations between the EU and Russia have soured. The Russian government sees the accession of former Soviet bloc states to the EU – as well as to NATO, the mutual defense partnership created to counter Soviet power – as a usurpation to Russia’s historical influence over its “near abroad.” The EU has watched Russia’s increasingly aggressive behavior with alarm, beginning with its 2008 invasion of Georgia and escalating with the 2014 annexation of Ukraine’s Crimea peninsula. Following its action in Crimea, Russia was expelled from the G8, a consortium of developed nations that includes EU members Germany, Italy, France, and the U.K., and portions of the PCA were suspended indefinitely.
The EU’s Russia policy is complicated by the diversity of its members. With close economic and cultural links with Russia, many eastern members advocate for accommodation, while most political leaders in the more historically influential western bloc see Russia is a significant threat to EU cohesion. However, those leaders – including Chancellor Merkel – face mounting pressure from nationalist political parties that advocate for strict immigration controls and closer ties with authoritarian regimes, including Russia’s.
Resurgent Nationalism & Illiberalism
Nationalism is on the rise across Europe, fed by slow economic growth, widening income inequality, and a powerful political backlash against intra-EU and transnational migration. According to the BBC, nationalist parties have won significant vote shares in nearly a dozen EU elections from 2010 to 2018. Nativists control the levers of power in Hungary, where openly anti-immigrant Viktor Orban, now in his third term as prime minister, advocates for radical change in Europe.
The nationalist resurgence complicates the EU’s efforts to present a united front on global human rights issues and threatens internal cohesion. Though every nationalist movement is different, EU nationalists generally oppose the Schengen Area status quo and advocate for the weakening or outright dissolution of the EU’s central government. Some ethnonationalist movements champion ethnic or linguistic partition, notably in Scotland and Catalonia, an autonomous region of northeastern Spain. Should their collective influence continue to grow, it’s difficult to see the EU following through on its expressed commitment to further integration.
So where does the EU go from here?
Observers propose a range of scenarios to improve, stabilize, or radically change the union as it enters its seventh full decade of existence.
Carme Colomina of the Barcelona Centre for International Affairs proposes strengthening the EU’s democratic institutions and holding EU member states to minimum social safety net standards, such as a minimum wage, minimum basic income, and housing security.
Jacobo Barigazzi of Politico EU offers a dozen ideas, some more realistic than others: a “two-speed” EU government with different rights and responsibilities for eurozone and non-eurozone members; a common unemployment insurance regime; delegating more decision-making power to member countries; abolishing the European Council; adding a directly elected European president; and allowing Greece to leave the euro, among others.
Most of these proposals probably won’t come to fruition anytime soon. But, for the sake of their cause, champions of market economics and representative democracy must hope that the EU shakes its malaise.
How do you feel about the European Union? Are you worried about its future?