How the European Union Works

The 28 nations that belong to the EU work together by participating in a number of common institutions, which set policy and promote their common interests. Here are some of the major ones [source: Archick]:

Decisions taken by the EU regarding economic and social policies are legally binding on all member nations, as long as the majority votes for them. However, for issues relating to security, agreement must be unanimous. One government can veto a decision and end it. For issues relating to justice policy, unanimity was also required, but in 2009, the Treaty of Lisbon changed that to a majority agreement.

The EU was created in the aftermath of World War II, as a way to at last put an end to the long history of economic strife and bloody warfare across the continent. In 1950, six nations — Belgium, France, Germany, Italy, Luxembourg and the Netherlands — formed something called the European Coal and Steel Community, with the idea of cooperating economically and politically. The Cold War conflict that pitted the U.S. and western Europe against the Soviet Bloc nations to the east only reinforced the need for Europe's democratic nations to unify. In 1957, they signed the Treaty of Rome, which created the European Economic Community, also known as the Common Market [source: EU].

In the 1960s, that cooperation led to prosperity. EU countries stopped charging customs duties when they traded with one another, which boosted trade. They also agreed to coordinate their food cultivation, which eliminated shortages and ensured that people across the European continent got enough to eat.

In the 1970s, the EU gradually expanded its geographical reach, with the U.K., Denmark and Ireland joining in 1973, bringing the total number of members to nine. But just as importantly, the organization began setting and carrying out policy in new areas, such as enacting stringent anti-pollution laws and introducing the principle that polluters had to pay to clean up environmental damage. By the middle of the decade, the EU also was spending a lot of money to create jobs and infrastructure in poor parts of Europe and reduce economic inequity. The European Parliament became more important, and in 1979, citizens of EU countries began electing their representatives directly for the first time [source: EU].

The 1980s saw more expansion of the EU, with Greece joining in 1981 and Spain and Portugal in 1986. That same year, the EU nations signed the Single European Act, a treaty that sought to eliminate trade conflicts and create a "single market" for the entire continent in which goods and services could move more freely without border checks. In 1989, the collapse of the communist regime in East Germany and the tearing down of the Berlin Wall, which led to the eventual reunification of Germany, signaled the start of a new period of evolution for the EU.

At the beginning of the 1990s, as communist regimes disintegrated in central and Eastern Europe, the EU countries became even more closely knit. In 1992, EU nations signed the Maastricht Treaty, one of the constitutional documents that created the EU from the earlier European Community. In 1995, three more nations — Austria, Finland and Sweden — joined the EU, and the Schengen agreements gradually allowed Europeans to travel across the continent without having their passports checked at national borders [source: EU].

In the decade that followed, the EU grew even larger. Ten new nations — the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia and Slovenia — joined in 2004, and Bulgaria and Romania in 2007. Croatia joined in 2013, increasing the membership of the EU to 28 nations [source: EU].

But by then, the EU was also experiencing stresses both from external and internal forces. Unrest and warfare in the Middle East created a surge of refugees, which Europe struggled to figure out how to accommodate. Terror attacks by extremist groups put European countries on edge [source: EU]. And in numerous countries, right-wing nationalist movements arose to challenge the idea of European unity.

Starting in 1999, some EU member nations began adopting a common currency, the euro, to replace their own national currencies. As of 2018, 19 of the EU's 28 members — a group called the eurozone — use the euro. In addition to having the same paper money and coins, eurozone participants share a common central bank, the European Central Bank, which sets a common monetary policy for them all [source: Archick].

While having a common currency has advantages, in recent years it's become evident that there are major downsides as well. The eurozone nations still set their own fiscal policies, and essentially retain authority over their national spending, taxes and international borrowing. That can mean that if a national government mismanages its finances, problems can ripple through the eurozone system.

In the 2000s, for example, the Greek government borrowed heavily from international lenders to cover its budget and trade deficits. Greece's debt load grew so huge that by 2010, it was in danger of not being able to keep up the payments, which got the markets worried about other eurozone nations that also had high debt loads. And Greece could not devalue its currency nor cut interest rates to attract more business.

Eventually, the EU had to organize a bailout, which included having the European Central Bank purchase a lot of debt from those financially strapped countries and extend more credit. Some of the countries that received EU help eventually recovered. But Greece's economy and banking system kept struggling, and by 2015 its government was demanding more debt relief and an easing of austerity measures that it had been forced to accept. There even were rumblings that Greece might stage a "Grexit," though eventually, a deal was reached in 2017 that provided more assistance and averted a departure. Even so, the crisis raised questions about the eurozone's long-term stability [source: Archick].

Having a single currency makes things easier for trade and eliminates currency volatility but it can also make things harder when economies are in trouble. EU members who don't use the euro say that this allows them to set monetary policies customized for their country's conditions rather than for Europe as a whole. Some experts believe the U.K. was able to recover from the 2008 global financial crisis quicker than say, Greece, because it could cut interest rates immediately.

EU members are required to enter the eurozone (i.e. use the euro) once they meet the requirements of admission. But they can put off meeting the requirements, which effectively means they do not adopt the euro. The U.K. and Denmark are two EU members who don't use the euro [source: Seth].

Since 1999, 22 of the EU's member states — Austria, Belgium, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, and Sweden — have chosen to get rid of their own internal border controls.

Instead, they've formed the Schengen Area, named after the town in Luxembourg where the agreement was signed. For travel and immigration purposes, the area essentially functions as one big country, with common rules for visas, asylum requests and border checks. There's an exception built in the rules that allows a country to reimpose its own controls for a short time when there's a major security threat or some international event, such as a sports championship or a big conference of world leaders [source: Archick].

Despite the freedom of movement that the Schengen Area allows, it doesn't result in as much migration as you might expect. Politico's European edition reported in 2018 that only 11 percent of people in the EU are living outside the country of their birth, compared to 13 percent in the U.S. And many of those immigrants actually come from other EU countries [source: Cokelaere].

But the EU has faced growing internal tensions over what to do about refugees from the Middle East and Africa, nearly 2 million of whom have arrived since 2014. Italy and Greece have taken most of the migrants, in large part due to their geographic location. Some countries want refugees to be distributed more evenly among all nations. Other countries don't want to accept any immigrants and have pushed for more restrictive EU immigration policies [source: Henley]. The issue is threatening the "freedom of movement" agreement within the EU and was one issue behind Brexit.

Article 50 of the Treaty of Lisbon, signed by member nations back in 2007 and effective in 2009, requires the EU to negotiate a severance with any nation that gives at least two years notice that it intends to leave [source: Lisbon Treaty].

So far, though, only one nation has opted to do that. In June 2016, the U.K. held a referendum on whether it should invoke Article 50, though most people knew it as Brexit. Though polls had predicted otherwise, U.K. voters shocked Europe by voting 52-48 percent to leave the EU [source: Archick].

Advocates of Brexit argued that the EU was a bad deal for the British, because it allowed workers from elsewhere in Europe to migrate to the U.K. and drive wages there down. They also felt that the EU had too much say over the affairs of the U.K. [source: Lee].

Others complained that the EU's regulations for fighting climate change and increasing renewable energy use were costly burdens to the U.K. economy. One thinktank calculated that the annual cost of fulfilling the 100 "most burdensome" EU regulations was 33.3 billion pounds (U.S. $42.6 billion) [source: BBC News].

The Brexit decision had all sorts of consequences and complications, many of which voters probably didn't foresee. For instance, the governor of the bank of England said in May 2017 the U.K. had already lost 2 percent of predicted growth and 4 percent from household incomes since the referendum [source: The Guardian]. And the thinktank's calculation, others noted, didn't account for the annual 58.6 billion pounds ($75.12 billion) in benefits Britain gained from being in the EU [source: BBC News].

On the other hand in December 2017, the firm EY predicted the U.K. would lose 10,500 financial industry jobs on day one of Brexit, as banks, brokerages and other financial companies started moving their operations to the continent to ensure that they'd still have unfettered access to European customers. But the City of London Corp. downgraded that loss to just 5,000 in August 2018 [sources: Musaddique, Contiguglia]. The real number, of course, is still a mystery.

Another unsettled matter is what happens to the border between Northern Ireland (part of the U.K.) and the Republic of Ireland, which is remaining in the EU. The 1998 Belfast Agreement, which put an end to the fighting in Northern Ireland, also did away with border checks. Neither the U.K. nor Ireland wants a return to border checks, but as of late 2018, they hadn't figured out a way to resolve this [source: Carswell].

Another uncertainty in the EU's future (besides Brexit) is its relationship with the U.S., with which it traditionally has worked to develop trade with other parts of the world. But in 2017, the U.S. got a new president, Donald Trump, who disliked multilateral trade agreements and wanted to make bilateral deals between the U.S. and other countries [source: Archick]. According to Washington Post columnist Josh Rogin, at one point Trump even boldly asked French President Macron why he didn't quit the EU, and offered France a better trade deal if it left.

After Trump hit Europe with steel and aluminum tariffs in 2018, many feared that a trade war would erupt. But in July of that year, Trump and EU officials seemed to call a truce. European Commission President Jean-Claude Juncker and Trump stood side by side at the White House to announce a deal in which the EU agreed to buy billions of dollars in U.S. exports such as soybeans and natural gas, and the U.S. agreed to work with the Europeans to avoid additional tariffs [source: Smith and Rushe].

If those negotiations fail, the U.S. and the EU could continue to drift apart. Some experts think the EU might seek a closer relationship with China instead [source: Archick]. But never has the EU's future seemed so rife with uncertainties.

It wasn't too hard to understand why Macron and other European leaders seem determined to make the U.K. feel economic pain for leaving. That's because if the EU made it easy and painless to quit, there was a danger that other countries — especially ones with rising far-right, anti-immigration nationalist political movements, such as Sweden — might follow [sources: Kirk, Hix and Sitter].