Economic and monetary union and the euro : for stability, growth and prosperity across Europe.
Date: 2014-05-28
Institutions: Directorate-General for Communication
Subjects: EU action, EU employment policy, Economic and Monetary Union, dissemination of EU information, economic growth, economic stabilisation, euro area

T H E   E U R O P E A N  
U N I O N  
E X P L A I N E D

For stability, 
growth and 
prosperity 
across Europe

Economic and 
monetary union 
and the euro 

‘A  w el l- fun c tio nin g  e co no m i c  an d 
m o ne tar y  un io n  an d  a  str o ng  and 
s tab l e  eu ro   ar e t he   fo und atio n s  fo r 
gr owth   and  jo b s   in   Eu r op e. ’

Ol li   Re hn,  Eur o pean  C o m m iss i on 
Vice -P r es id en t  for   E co no m i c  and 
Mo n et ary  Af f air s   an d  t he  Eu r o

THE EUROPEAN UNION 
EXPLAINED

This publication is a part of a series that explains  
what the EU does in different policy areas,  
why the EU is involved and what the results are.

You can see online which ones are available  
and download them at:
http://europa.eu/pol/index_en.htm

CONTENTS

Why do we need an economic  
and monetary union and the euro?
A common policy for  
a common currency  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . . 3

What is economic and  
monetary union in practice?
Common principles for stability  
and growth  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . . 7

How is the EU working  
to boost growth?
Emerging stronger together  
from the crisis  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 11

Outlook
The way forward: towards a deep  
and genuine economic and  
monetary union  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 17

Short glossary of technical  
terms used  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 18

Find out more  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 20

How the EU works
Europe 2020: Europe’s growth strategy
The founding fathers of the EU

Technical terms marked with a (*) are further explained in a short 
glossary at the end of this publication .

Agriculture
Borders and security
Budget
Climate action
Competition 
Consumers
Culture and audiovisual
Customs
Development and cooperation
Digital agenda

Economic and monetary union and the euro 

Education, training, youth and sport
Employment and social affairs
Energy
Enlargement
Enterprise
Environment
Fight against fraud
Food safety
Foreign affairs and security policy
Humanitarian aid and civil protection
Internal market 
Justice, citizenship, fundamental rights
Maritime affairs and fisheries
Migration and asylum
Public health
Regional policy
Research and innovation
Taxation
Trade
Transport

The European Union explained: 
Economic and monetary union and the euro

European Commission
Directorate-General for Communication
Publications
1049 Brussels
BELGIUM

Manuscript updated in March 2014

Cover and page 2 picture: © ccvision.de
Page 8 pictures: © Tom Grill/Corbis,  

16 pp. — 21 × 29.7 cm
ISBN 978-92-79-35738-1
doi:10.2775/19726

Luxembourg: Publications Office of the European Union, 
2014

© European Union, 2014
Reproduction is authorised. For any use or reproduction 
of individual photos, permission must be sought directly 
from the copyright holders.

3

Why do we need an economic and monetary 
union and the euro?

  A common policy for a common currency

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What led to the adoption of the euro?

Despite being commonplace nowadays, the euro did not 
come about overnight. The launch of the euro was a 
major, but relatively recent, milestone in the story of 
European integration since the end of the Second World 
War — a story in which economic and political 
objectives have always been closely linked. It all started 
in the aftermath of the war when the priority was to 
ensure lasting peace and to reconstruct the European 
economy by strengthening cooperation between 
countries, especially in terms of free trade.

Beyond its economic dimension, the euro is a powerful, 
tangible symbol of European unity, identity and 
cooperation. The Maastricht Treaty launched the 
economic and monetary union (EMU) and, at the same 
time, committed the European Union ‘to continue the 
process of creating an ever closer union among the 
peoples of Europe’. The EMU required deeper integration 
at policy level and thus closer political integration. While 
the economic and monetary union applies to all 
EU countries, a number of specific rules apply to euro 
area countries given the fact that they share a common 
currency.

Over 330 million EU citizens use the euro in their daily lives.

The euro: a landmark in European 
integration

The euro is part of the everyday life of European 
Union (EU) citizens from 18 different countries. It has 
been in circulation since 2002 and is used by over 
330 million people for their daily requirements, to save 
for tomorrow and to invest in the future. It is now the 
most important currency in the world after the 
US dollar. There is no other example of such deep and 
large-scale monetary cooperation between sovereign 
countries.

The euro is a major achievement of European 
integration, a milestone for countries that were 
frequently at war with each other throughout history: 
economic integration and solidarity of this kind were 
indeed unthinkable in the past. By 2020 there will be a 
new generation of young adults who will have grown up 
using only the euro as their national currency. 

ECONOMIC AND MONETARY UNION AND THE EURO 
4

The euro: a brief history

 — Foundations. The Treaty of Rome of 1957 

based Europe’s reconstruction on the gradual 
development of a borderless common market 
involving the free movement of goods, services, 
people and capital between participating 
countries. 

 — Long-term ambition. From the 1960s and 

1970s, the idea of an economic and monetary 
union (EMU) — in other words, a highly 
integrated single market (*) with a single 
monetary policy (*) and a single currency — 
became a new and recurring European ambition 
against the backdrop of a weak US dollar, oil 
crises and currency instability. 

 — Harmonisation. The European Monetary 
System, a precursor to the economic and 
monetary union, was launched in 1979 to 
stabilise exchange rates, limit currency 
fluctuations between countries and curb price 

WHICH COUNTRIES ARE IN THE EURO AREA?

increases (inflation). It represented a radical 
transfer of monetary policy to the European 
level. 

 — Economic and monetary union (EMU). By 

adopting the 1992 Treaty on European Union 
(better known as the Maastricht Treaty), EU 
governments agreed to launch the EMU. Its goal 
was to complete the single market, establish 
the European Central Bank (ECB) and deliver a 
stable single currency by the end of the century. 

 — Euros in pockets. Euro banknotes and coins 
were introduced as a new single currency in 
2002, replacing national currencies — like the 
French franc, the German deutschmark and the 
Spanish peseta — in 12 European countries. 
Today, the number of EU countries participating 
in the euro (‘euro area’ or ‘eurozone’ countries) 
has grown from 12 to 18. See map below. 

Azores (PT)

Madeira (PT)

Canary Islands (ES)

Guadeloupe (FR)

Martinique (FR)

Réunion (FR)

French 
Guiana

Date of entry into the euro area:

1 January 1999: Belgium (BE), Germany (DE), Ireland (IE), 
Spain (ES), France (FR),  Italy (IT), Luxembourg (LU), 
the Netherlands (NL), Austria (AT), Portugal (PT) 
and Finland (FI)

1 January 2001: Greece (EL)
1 January 2007: Slovenia (SI)
1 January 2008: Cyprus (CY) and Malta (MT)
1 January 2009: Slovakia (SK)
1 January 2011: Estonia (EE)
1 January 2014: Latvia (LV)

EU countries not using the euro:

Bulgaria (BG), Czech Republic (CZ), Denmark (DK), 
Croatia (HR), Lithuania (LT), Hungary (HU), 
Poland (PL), Romania (RO), Sweden (SE) and 
the United Kingdom (UK)

PT

ES

IE

UK

NL

BE

LU

FR

SE

PL

SK

HU

CZ

AT

SI

HR

DK

DE

IT

FI

EE

LV

LT

RO

BG

EL

All EU countries are part of the economic and monetary union 
to some extent, but not all of them use the euro. Two 
countries (Denmark and the United Kingdom) opted out of the 
euro at the time of the Maastricht Treaty. Others have not yet 
met all of the economic criteria required by the Maastricht 
Treaty, regarding for instance the stability of prices and 
exchange rates, to adopt the euro.

MT

CY

THE EUROPEAN UNION EXPLAINED 
 
 
 
5

•  The economic and monetary union supports 

economic growth: The pooling of economies and 
markets at European level brings the benefits of 
greater size as well as a common framework to 
improve internal efficiency, competitiveness and 
robustness both in the EU economy overall and in the 
economies of individual EU countries. That, in turn, 
supports economic stability, stronger growth and 
more jobs.

•  The euro is practical for citizens: The advantages of 
the single currency are immediately obvious to anyone 
travelling between the 18 euro area countries. For 
instance, the euro put an end to the cost and hassle of 
exchanging currencies at borders. It has also made 
cross-border shopping and price comparisons — 
including for online purchases — much easier and 
more transparent, thus boosting competition and 
keeping prices down for the EU’s 500 million 
consumers. Finally, the European Central Bank has 
consistently ensured price stability in the euro area, 
thus better protecting citizens’ purchasing power.

What are the benefits of the economic 
and monetary union and the euro?

•  The economic and monetary union underpins the 

euro: It deals with monetary policy (*) (price stability 
and interest rates), economic policy (*) and aspects of 
fiscal policy (*) (in order to limit governments’ annual 
deficits and debts — see next chapter). It aims to 
provide a stable and growth-friendly economic 
environment for the euro area and the single market, 
hence one of its main purposes is to ensure a strong 
and stable euro.

•  The economic and monetary union ensures price 

stability: The independent European Central 
Bank (ECB) is in charge of monetary policy, including 
printing money, for the euro area. Its main objective is 
to maintain the stability of consumer prices and to 
safeguard the value of the euro by setting and 
adjusting the interest rates for ECB lending. To 
achieve this, it aims to maintain inflation rates at just 
under 2 % in the medium-term, a rate considered low 
enough for consumers to fully reap the benefits of 
price stability. (In the 1970s and 1980s, many EU 
countries had very high inflation rates, reaching 20 % 
or more in some cases. Inflation fell as they started 
preparing for the euro and, since the introduction of 
the euro, it has remained at around 2 % in the euro 
area.)

INFLATION HAS BEEN KEPT AT AROUND 2 % IN THE EURO AREA

The European Central Bank (ECB) ensures that inflation is 
maintained at around 2 % in the euro area.

Launch of the euro

% 

5 

4 

3 

2 

1 

0 

-1 

1990

1995

2000

2005

2010

Harmonised index of consumer
prices (HICP; annual rate)  

Average inﬂation 
(1999–today; annual rate)

Source: European Commission. 

Data prior to 1996 are estimated 
on the basis of non-harmonised 
national consumer price indices 
(CPIs).

ECONOMIC AND MONETARY UNION AND THE EURO6

•  The euro is good for business: The euro also has 
significant benefits for European businesses. For 
example, stable interest rates, promoted by the 
economic and monetary union, help companies to 
invest more in jobs and wealth creation. The adoption 
of the euro also ended competition between national 
monetary policies and eliminated transaction costs 
for currency exchanges, reducing risks and allowing 
more capital to be released for productive 
investments. Price stability also gives companies the 
security to make longer-term plans and investments 
which can improve competitiveness (*). That is 
particularly important in our globalised economies 
where European companies compete with players 
from all continents.

•  The euro is a global player: The euro serves Europe 

as a whole. It gives Europe a stronger voice, and more 
economic clout, in global trade. It provides a stable 
currency, backed by a major economic bloc — the 
euro area — that is more resistant to global shocks. 
And a currency of such strength and stability 
buttresses Europe’s position in the world economy. 
The euro stands alongside the US dollar as the 
currency of choice for transactions at the global level: 
it is the second most traded currency in foreign 
exchange markets, present in around 40 % of daily 
global transactions. In fact, over €980 billion are in 
circulation and more than 100 million people outside 
of Europe use currencies which are pegged to the 
euro. Finally, since its launch in 1999, the euro area 
has continued to attract direct foreign investments 
from countries all over the world.

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All euro coins have a common side and a national side on the 
reverse. Coins and notes issued in one euro area country can 
be used in any other euro area country.

Throughout the financial crisis (see next chapter), 
the euro broadly maintained its value compared to 
other world currencies such as the US dollar, at 
around $1.3 for €1.

THE EUROPEAN UNION EXPLAINED 
7

What is economic and monetary union  
in practice?

  Common principles for stability and growth

What are the basic rules of the 
economic and monetary union?

The Stability and Growth Pact: keeping 
public finances in check

Economic and monetary union is in fact an umbrella 
term bringing together several different policies 
designed to promote growth in the EU and to preserve 
the strength and stability of the euro. The economic and 
monetary union covers monetary policy (‘monetary 
union’), fiscal policy and economic policymaking 
(‘economic union’). See the ‘economic and monetary 
union overview’ table below for an overall summary.

These policies are managed by either national or 
European authorities, or by a mixture of the two. 
Monetary policy is managed exclusively by the 
independent European Central Bank (see previous 
chapter). Fiscal policy (taxation and public finances) is 
the responsibility of national governments. However, 
decisions concerning the public finances of individual 
EU countries can have an impact throughout the EU. 
The economic and monetary union therefore includes 
some essential rules concerning public finances, jointly 
designed and adopted by all EU countries, which are 
enforced by the European Commission to preserve 
economic stability. The main instrument for guiding and 
coordinating economic decision-making in EU countries 
is the Stability and Growth Pact. The Pact was 
originally introduced in 1999 and has been 
strengthened since 2011 (see next chapter).

In order to work effectively, the economic and 
monetary union relies on all EU countries, especially 
those in the euro area, to comply with commonly 
agreed rules. In particular that includes keeping 
their public finances in order — in other words, 
ensuring an appropriate balance between spending 
and income in national budgets.

The government deficit is the amount by which 
government spending exceeds government income 
in a given year. The Stability and Growth Pact 
requires governments to ensure that their yearly 
deficits do not exceed 3 % of their total annual 
production (or gross domestic product (GDP)). EU 
countries submit their budgetary plans to the 
Commission; they are then assessed annually in the 
context of the European semester (see next 
chapter).

The public debt is the total amount of accumulated 
government deficits. When government spending 
exceeds government income (leading to a yearly 
deficit), the government concerned has to borrow 
money or raise taxes to fill the gap. A country’s 
public debt is therefore the total amount of money 
that a government owes over several years. The 
Stability and Growth Pact requires governments 
to ensure that their debts do not exceed 60 % of 
their GDP (or continue to be reduced at a 
satisfactory pace towards this proportion).

The existence of yearly deficits and overall debt, 
which can oblige governments to generate 
additional income, is not a problem in itself. It can 
be a means of investing in future economic growth. 
The purpose of the Stability and Growth Pact is to 
prevent excessive borrowing and unsustainable 
public debts, which burden economic development.

ECONOMIC AND MONETARY UNION AND THE EURO8

ECONOMIC AND MONETARY UNION (EMU) OVERVIEW

Monetary union

Economic union

Monetary policy

Fiscal policy

Economic policymaking

What does  
it cover?

Who manages?

Price stability: setting of 
interest rates for the euro 
area to maintain inflation 
at just under 2 %
–––
Circulation of euro coins 
and banknotes

The European Central Bank 
(ECB) sets interest rates 
and prints euro banknotes
–––
National governments 
issue euro coins in 
quantities approved  by the 
ECB

Public finances (levels 
of spending and 
borrowing by national 
governments)

Taxation 
(government income)

Decisions concerning 
education systems, 
labour markets, 
pensions, ...

National governments’ 
responsibility
–––
The EU enforces 
common rules on 
national deficits/debts

National 
governments’ 
responsibility

National governments’ 
responsibility
–––
The EU coordinates and 
makes 
recommendations in the 
framework of the 
European semester

More 
information?

See chapter 1

See chapter 2

See chapter 3

What happens if the rules are broken?

If the European Commission finds that an EU country 
has breached the common Stability and Growth Pact 
rules on deficits/debts, it can start procedures to rectify 
the situation. If the breaches are not of a temporary or 
exceptional nature, the Commission recommends that 
EU finance ministers launch proceedings against the 
country in question using the excessive deficit 
procedure (*). Unless a majority of EU finance ministers 
reject the recommendation, the country concerned must 
submit a detailed plan to bring its deficit or debt levels 
within the limits set by the pact and according to a 
given deadline. (See next chapter for further 
information.)

These rules, approved by all EU countries and EU 
institutions, demonstrate that economic decision-
making is a matter of common concern and shared 
responsibility — especially within the euro area. While 
the monitoring aspects of the Stability and Growth Pact 
apply to all EU countries, fines for breaches of the rules 
can only be imposed upon euro area countries. 
Generally speaking, every EU country, and in particular 
the euro area countries, needs to have confidence in the 
fact that prudent policymaking is the norm, that 
mechanisms exist to identify and correct divergences 
and that good economic housekeeping in one country 
will not be jeopardised by more spendthrift behaviour 
elsewhere. 

THE EUROPEAN UNION EXPLAINED9

The European Central Bank (ECB) and the Eurosystem 
explained in 3 minutes.

To watch the video, see:
https://www.youtube.com/watch?v=TAlcFwGIQBg 

EUROPEAN PARLIAMENT — Shares the job of 
formulating laws with finance ministers (in the Ecofin 
Council) and exercises democratic oversight of the 
management of the economic and monetary union.

NATIONAL GOVERNMENTS — Set their national 
budgets within agreed limits for deficits/debts and 
implement decisions taken by the EU Council of 
Ministers. They are responsible for economic policies, 
education, labour, social policy and pensions, to mention 
but a few.

EUROPEAN CENTRAL BANK — Independently 
manages monetary policy in the euro area: stabilises 
prices by setting interest rates so as to control inflation 
in the medium-term.

Who manages the economic and 
monetary union? — a shared 
responsibility

The economic and monetary union is managed by 
several EU and national institutions, each with its own 
role. This management process is known as ‘economic 
governance’ and involves the following actors.

THE EUROPEAN COMMISSION — Makes economic 
forecasts and monitors a range of economic indicators 
for all EU countries to ensure that they comply with the 
jointly agreed Stability and Growth Pact rules. The 
Commission assesses the economic situation and 
makes regular recommendations to the Council of 
Ministers, representing the governments of all 
EU countries (the finance ministers take decisions in the 
Ecofin Council (*)).

THE EUROPEAN COUNCIL — Heads of state or 
government from all EU countries set out the main 
policy orientations.

THE EURO SUMMIT — At least twice per year, the 
heads of state or government of the euro area 
countries meet to coordinate the governance of the 
euro.

EU COUNCIL OF MINISTERS (‘ECOFIN COUNCIL’) 
— The Council of Ministers brings together ministers 
from all EU countries, with different council formations 
according to the policy field. The ‘Ecofin Council’ is 
composed of finance ministers from all EU countries 
who coordinate and legislate on EU economic and 
financial policy in a number of areas. These areas 
include: economic policy coordination, economic 
surveillance, monitoring of EU countries’ budgetary 
policies and public finances, the euro (legal, practical 
and international aspects), financial markets,  
capital movements and economic relations with  
non-EU countries. On the basis of the Commission’s 
proposals, they take decisions which are legally binding 
for EU countries.

EUROGROUP — Finance ministers from all euro area 
countries meet to discuss euro-related matters, usually 
ahead of the Ecofin Council, where decisions are 
formally adopted (see above).

ECONOMIC AND MONETARY UNION AND THE EURO10

How did the economic and financial crisis occur?

The crisis, which has deeply affected many 
countries both inside and outside of the euro area 
since late 2009, is in fact the culmination of several 
crises and factors, including a financial (or banking) 
crisis, an economic crisis and a sovereign debt 
crisis (*), coupled with hardship for people in some 
EU countries.

From 2000: debts and economic divergences …

For a number of years, many EU countries had built 
up significant debts and deficits. The Stability and 
Growth Pact was reaching its limits: by 2004 
several countries had broken its rules, which proved 
difficult to enforce. A common currency requires the 
economic actors from participating countries to 
have enough flexibility to adapt to economic 
change. However, economic divergences between 
countries, in terms of workforce productivity and 
wages, were growing. In addition, some countries 
were no longer competitive in economic terms. 
These imbalances built up over many years and 
were not properly addressed in some countries; at 
the same time, the EU did not have at its disposal 
the tools to address them. In fact, it had a full 
monetary union without a full economic union 
underpinning it.

2007–08: a global financial crisis

In 2007 and 2008, several major US banks 
including Lehman Brothers, the fourth largest US 
investment bank, went bankrupt as a result of risky 
lending on the mortgage market (bursting of the US 
‘subprime’ lending bubble). Given the 
interconnectedness of the global economy, financial 
contagion ensued in banks all over the world. Banks 
stopped lending to each other and credit dried up. 
To prevent the whole banking system from 
collapsing, between 2008 and 2011 EU countries 
inside and outside of the euro area responded by 
injecting around €1.6 trillion into their banks by 
means of guarantees and direct capital (almost 
13 % of the EU’s GDP), which added to their existing 
deficits and debt.

2009: economic crisis

The EU economy went into a deep recession in 
2009. EU countries designed economic stimulus 
policies to counter the economic downturn. 

2010–12: sovereign debt crisis

In late 2009, some of the most exposed euro area 
economies (for instance Ireland, Greece and 
Portugal) could no longer sustain their soaring debt 
and confront the financial crisis simultaneously. 
That resulted in a ‘sovereign debt’ crisis. Financial 
market investors lost confidence both in those 
countries’ ability to pay back their debts and in their 
overall competitiveness. The interest that investors 
demanded for government bonds (*) became so 
high that they could no longer borrow on the 
financial markets by selling new bonds. And since a 
share of those bonds was held by investors in other 
euro area countries — for example banks — the 
crisis became a much wider problem. Banks lost 
confidence to lend to businesses and to private 
households, resulting in a ‘credit crunch’.

In order to overcome the crisis, public finances had 
to be brought back to order and structural reforms 
had to be undertaken to claw back competitiveness. 
The euro area countries established the European 
Stability Mechanism (ESM) which provided 
significant loans to those countries most in need 
(see next chapter). A mild economic recovery 
became apparent in 2011, though the EU economy 
suffered a slight recession again in 2012.

2013–14: recovering from the crisis

In 2013 the EU economy slowly began to recover 
from the protracted recession. EU economic policy 
focused on sustainable growth and job creation and 
allowed countries to continue to consolidate their 
public finances at a slower and tailor-made pace, 
according to individual circumstances. At the same 
time, EU countries have understood the need to 
intensify structural reforms to unlock growth in 
Europe.

The major challenge remains to spur job creation. 
Greece and Spain in particular have unemployment 
rates of over 25 %. The European Commission and 
EU countries have launched a wide range of 
measures to get the unemployed back into 
education, training and employment and to promote 
strong and durable economic growth.

For more information on the EU’s growth strategy, 
called the Europe 2020 strategy, see the section of 
this publication on the European semester (next 
chapter) or consult  
http://ec.europa.eu/europe2020/index_en.htm

THE EUROPEAN UNION EXPLAINED 
11

How is the EU working to boost growth?

  Emerging stronger together from the crisis

Lessons learnt: stepping up cooperation

One key lesson learnt from the crisis is the extent to 
which EU — and especially euro area — countries count 
on each other to thrive: if one prospers, others benefit; 
if one falters, others suffer. Acting according to the 
concept of offering solidarity in return for solidity, 
euro area countries assisted Ireland, Greece, Cyprus and 
Portugal with conditional financial assistance, notably 
to help them to avoid accumulating excessive debts 
(see illustration below). Meanwhile, Spain was provided 
with conditional financial assistance to repair its 
banking sector.

Ireland and Spain successfully completed and 
exited their assistance programmes, in December 
2013 and January 2014 respectively, reflecting a 
return in market confidence, an improved economic 
outlook and declining unemployment.

The guiding principle is that stronger mutual solidarity 
can only be pursued in return for stronger individual 
responsibility, which in turn can only emerge from a 
profoundly democratic process. 

Another important lesson is that countries in an 
interdependent economic system like the euro area 
cannot allow deficits and debt to accumulate 
indefinitely. Similarly, economic divergences between EU 
countries in terms of growth and competitiveness 
cannot be left uncorrected: monetary union is 
insufficient without deeper economic union, which 
requires closer political integration. That is why, since 
2010, national governments have decided to reinforce 
their cooperation at EU level by introducing a series of 
new measures, outlined below. The purpose of these 
measures is to give the EU the means to act effectively, 
both to prevent similar crises and to kick-start growth 
and jobs across the European economy. They imply a 
significant strengthening of economic and political 
cooperation, particularly between euro area countries, 
now and in the future. 

A video from the European Commission explaining  
the economic and financial crisis: how the EU  
has found solutions to tackle the financial crisis,  
how it is reinforcing its economic and monetary union  
and how this is paving the way towards a political union.

To watch the video, see:  
https://www.youtube.com/watch?v=0B3zNcFYqj0

ECONOMIC AND MONETARY UNION AND THE EURO12

Financial assistance for Greece

Exiting the crisis, restoring growth

In late 2009, the Greek government admitted that 
its public deficit was much higher than previously 
reported. That was due to overspending (for 
instance in the oversized and inefficient public 
sector), tax evasion and inadequate national 
economic policies leading to rigid market structures, 
often dominated by powerful organised interest 
groups.

To save Greece from bankruptcy and to enable it to 
honour its obligations towards the welfare benefits 
of Greek citizens and the wages of its public 
employees, the euro area countries and the 
International Monetary Fund (IMF) have, since 2010, 
provided Greece with loans worth nearly 
€240 billion, to be paid back over a long period.

In exchange for this support, the Greek authorities 
have been addressing the country’s weaknesses 
through a wide range of measures. They aim to 
make the country’s public finances sustainable 
while protecting the most vulnerable, make the tax 
system fairer and more efficient, modernise public 
administration to better respond to the needs of the 
Greek population, repair the banks so that they can 
start lending to households and businesses again, 
and change laws that impede the country’s 
businesses from competing, investing and creating 
jobs.

The implementation of these measures is monitored 
by the European Commission, the European Central 
Bank and the IMF, which report regularly to their 
respective members (the European Commission 
reports to euro area countries). Lenders pay out 
loans in regular instalments provided that Greece 
assures them that it is complying with its reform 
commitments.

Ownership of the measures by Greece and social 
fairness are prevailing priorities in order for the 
reform programme to bring about a successful 
economic turnaround.

With the support of EU countries and the special 
‘Task force’ dedicated to providing targeted 
technical assistance to Greece, a wide range of 
reforms are being tackled. These include 
streamlining social security funds, supporting the 
national anti-corruption strategy, increasing the 
efficiency of tax collection and building a leaner and 
more efficient public administration.

The EU has taken decisive action to prevent future 
crises and to restore growth by better coordinating 
economic decision-making.

1 . THE ‘EUROPEAN SEMESTER’: A NEW APPROACH TO 
ECONOMIC COOPERATION

Europe 2020 (*) is the EU’s strategy for economic 
growth and job creation until 2020. The cornerstone of 
Europe 2020 is the European semester, set up in 2010 
as a yearly cycle of economic policy coordination and 
dialogue involving European institutions, EU 
governments and national parliaments. As part of this 
exercise, the Commission carries out an annual health 
check (‘annual growth survey (AGS)’) of the economies 
and finances of EU countries and publishes the survey 
every November, which is then discussed in depth by 
national and EU authorities. In May-June the following 
year, the Commission makes economic and budgetary 
policy recommendations tailored to each country 
(‘country-specific recommendations’) which are 
subsequently discussed and adopted by all EU leaders 
and finance ministers. They are designed to help get 
growth moving again, boost job creation, improve 
training and education opportunities and 
apprenticeships, assist small and medium-sized 
companies in accessing finance, stimulate growth by 
enhancing research and innovation and much more 
besides.

The European semester strengthens the economic and 
monetary union as a whole. By working together, 
long-term solutions are put in place to ensure stability 
and growth rather than quick fixes driven by short-term 
objectives. It also provides a framework and a binding

THE COST OF BORROWING FOR GOVERNMENTS 
IN FIVE EU COUNTRIES

%

45

40

35

30

25

20

15

10

5

0

’07

’08

’09

’10

’11

’12

Germany

France

Ireland

Portugal

Greece

Source: European Commission .

10-year sovereign bond yields

THE EUROPEAN UNION EXPLAINEDR
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Autumn economic forecasts

Winter economic forecasts

Spring economic forecasts

S
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A

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Commission 
publishes 
annual 
growth survey 
and alert 
mechanism 
report (*)

€ 
AREA

Commission 
opinion 

on draft 
budgetary 
plans

Commission 
publishes  
in-depth 
reviews  
of countries 
with potential 
risk

R
D

I

Bilateral 
meeting with 
Member 
States

R
S
C

Commission 
proposes 
country-specific 
recommendations 
for budgetary, 
economic and 
social policies

Bilateral 
meeting with 
Member 
States

13

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E
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O
T
C
O

Bilateral 
meeting with 
Member 
States

I

I

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N
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P
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L
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O
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€ 
AREA

Finance 
ministers 

discuss 
opinions
on draft 
budgetary 
plans

National 
ministers adopt 
conclusions 
on AGS + AMR 
and agree main 
priority areas

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EU leaders 
adopt 
economic 
priorities 
based on 
AGS

National 
ministers 
discuss the 
CSRs

R
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EU leaders 
endorse final 
CSRs

R
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Member 
States  
adopt 
budgets

Member states submit  
their stability or 
convergence programmes 
(on budgetary policies) 
and national reform 
programmes (on economic 
policies)

Debate/
resolution 
on AGS

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M

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S

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The European semester strengthens European economic management by closely 
coordinating national economic policy-making in the EU.

€ 
AREA

Member States 
submit draft 
budgetary 

plans + economic 
partnership 
programmes (EDP 
countries)

S
G
A

Debate/
resolution on 
the European 
semester and 
the AGS

annual timeline for managing the new anti-crisis and 
pro-growth measures adopted since the start of the 
crisis (see points 2–4 below).

2 . A COMPREHENSIVE STRATEGY TO ENSURE 
FINANCIAL STABILITY

Reinforced prevention of excessive deficits and 
debts …

To avoid the build-up of excessive deficits and debt, the 
Stability and Growth Pact (see previous chapter) was 
reinforced in December 2011 when a new package of 
EU laws came into force. The package was nicknamed 
the ‘six-pack’ because it contained six pieces of 
legislation designed to strengthen economic 
management in the EU.

ANNUAL GDP GROWTH IN THE 28 EU COUNTRIES

Real GDP growth, EU-28

Forecast 

% 

5 

4 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

96 

98 

00 

02 

04 

06 

08 

10 

12 

14 

Steady economic growth, as well as many of the millions of 
jobs created in the EU up until 2008, were lost as the crisis 
took hold. The purpose of the new economic management 
framework, known as the European semester, is to promote 
growth, create jobs and prevent future crises.

ECONOMIC AND MONETARY UNION AND THE EURO 
 
 
 
14

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Olli Rehn, Commission Vice-President for Economic and 
Monetary Affairs and the Euro, giving a press conference on 
the entry into force of the ‘six-pack’ legislative package.

The reform made the Stability and Growth Pact more 
transparent and binding, increasing the Commission’s 
responsibilities for monitoring and assessing national 
budgets. If an EU country breaches the commonly 
agreed deficit/debt limits then it must demonstrate that 
it is taking appropriate action to fix the situation 
according to a clear timetable. Recommendations made 
by the Commission for specific countries are now better 
enforced. Financial penalties (including fines), which can 
be imposed on euro area countries if they fail to 
balance their accounts, kick in earlier and can be 
gradually stepped up. EU regional and agricultural 
funding, amongst others, can be suspended for both 
euro area and non-euro area members if they 
consistently breach the provisions of the Pact. At the 
same time, the reinforced Stability and Growth Pact 
takes into consideration specific economic conditions in 
each country when applying the rules, rather than using 
a ‘one-size-fits-all’ approach. 

In 2012, all EU countries, except the the Czech Republic 
and the United Kingdom, strengthened their 
commitment to the Pact when they signed an 
international agreement called the Treaty on Stability, 
Coordination and Governance in the Economic and 
Monetary Union, also known as the ‘Fiscal Compact’ 
(NB In 2014 the Czech Republic subsequently confirmed 
its intention to sign the treaty). It demonstrates those 
countries’ willingness to enshrine a culture of financial 
stability in their national legislation by requiring them to 
have their national budgets in balance or in surplus. It 
makes corrective action more automatic by extending 
new voting rules and requires firmer commitments from 
euro area countries.

In May 2013, two new pieces of legislation — the 
‘two-pack’ — entered into force. The ‘two-pack’ 
reinforces economic and budgetary cooperation (and 
thereby the Stability and Growth Pact) even further 
between euro area countries. In particular, it 
strengthens the coordination and monitoring of national 
budgetary policies. The Commission analyses and 
makes assessments of the draft yearly budgetary plans 
of euro area countries before the budgets are passed 
by national parliaments. It also steps up the 
Commission’s monitoring of euro area countries facing 
severe financial difficulties and makes parts of the 
Fiscal Compact binding under EU law. The aim is to 
ensure that national budgets are balanced and that 
euro area countries in particular do not accumulate 
excessive deficits and debts, thereby avoiding future 
economic crises.

… and financial support for those most in need

In autumn 2012, euro area countries set up a new, 
permanent emergency fund (or ‘firewall’(*)) called the 
European Stability Mechanism (*) with a total lending 
capacity of €500 billion. It is among the largest of its 
kind in the world. It can make financial loans available 
to euro area countries facing temporary difficulty in 
borrowing money from financial markets because of 
concerns over their debt levels. Its lending is based on 
strict conditions which include bringing public finances 
back to sustainable levels, in line with the Stability and 
Growth Pact, and continuing with structural reforms. It 
thereby boosts the confidence of financial markets in 
the capacity of those countries to repay their debts and 
to restore competitiveness over time. Overall, it helps to 
ensure the financial stability of the euro area as a 
whole.

In 2009 and 2010, two temporary emergency funds 
(or ‘firewalls’) were set up to help EU countries 
struggling with their debts: the European Financial 
Stability Facility (*) and the European Financial 
Stabilisation Mechanism (*). A new, permanent fund 
was set up at the end of 2012, called the European 
Stability Mechanism (*), which has since then 
provided significant loans to euro area countries in 
difficulty.

THE EUROPEAN UNION EXPLAINED 
 
15

The European Globalisation Adjustment Fund is 
another instrument which was used to mitigate the 
negative effects of the crisis. The Fund supports people 
who lose their jobs as a result of globalisation (for 
example, the outsourcing of a company’s activities 
outside of the EU) but also as a result of major 
economic and financial crises. It provides training, 
mentoring and careers advice to workers and the 
self-employed. The fund will have a total budget of over 
€1 billion for the 2014–20 period.

Finally, in the area of regional policy, funding for 
regional investment projects was delivered more rapidly 
to EU countries as a response to the crisis, particularly 
to those receiving economic assistance packages. In 
addition, to alleviate strain on national budgets at a 
time of budgetary limitations, the EU contribution to 
regional projects was increased while the national 
contributions expected decreased.

Purpose

Countries concerned

Euro area countries

All EU countries

European semester  
(since 2010)

Stability and Growth Pact 
(reinforced by ‘six-pack’ 
legislation in 2011 and by the 
‘two-pack’ in 2013)

Fiscal Compact (Treaty on 
Stability, Coordination and 
Governance in the Economic 
and Monetary Union (TSCG), 
2012)

European Stability Mechanism 
(2012)

European Globalisation 
Adjustment Fund (set up in 
2006)

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Yearly coordination of 
economic policies 
between the EU and 
national governments

✔

The Commission can  
issue additional 
recommendations to  
euro area countries

✔

✔

✔

Only available to euro 
area countries who have 
signed the Fiscal Compact

✔

Economic/budgetary 
coordination and 
surveillance in order to 
avoid excessive deficits/
debts in EU countries

Further strengthens the 
Stability and Growth Pact: 
countries commit to 
having their budgets in 
balance

European emergency fund 
with €500 billion to help 
countries with temporary 
difficulties in borrowing 
from financial markets 
due to excessive debts

Fund with an annual 
budget of €150 million to 
help workers made 
redundant due to 
globalisation or a major 
economic and financial 
crisis

✔

✔

European scrutiny of 
national budgets, as well 
as fines in cases where 
the pact is breached, only 
apply to the euro area

Signed by all EU countries 
except Croatia and the 
United Kingdom. Denmark 
and Romania have 
declared themselves 
bound by all treaty 
articles

✗

✔

Summary of measures taken by the EU institutions and  
EU countries since 2010 to better coordinate their economic 
policies, prevent deficit/debt crises and provide assistance to 
countries facing financial difficulty.

ECONOMIC AND MONETARY UNION AND THE EURO 
 
 
 
 
16

3 . ANTICIPATING AND CORRECTING MAJOR 
ECONOMIC IMBALANCES

The crisis exposed the depth of economic imbalances 
between certain EU countries, for instance in terms of 
competitiveness and productivity. These imbalances are 
particularly problematic when they concern euro area 
countries because working together under a common 
system means, for instance, that countries cannot 
temporarily compensate for a loss of competitiveness 
by adjusting exchange rates to devalue their currencies. 
(Devaluations of this kind are usually followed by 
inflation, which over time undoes the effects of 
competitive devaluation in any case.) The fewer 
economic imbalances there are between EU countries, 
the stronger the EU — and especially the euro area — 
is as an economic bloc.

The EU has therefore reinforced its monitoring of its 
members’ economies, with a particular focus on the 
euro area countries. The ‘six-pack’ of 2011 also 
introduced a Macroeconomic (*) imbalance procedure, 
a new early warning system to identify and avoid 
potential imbalances much earlier than before. The 
Commission monitors a range of economic indicators 
that can affect overall competitiveness such as house 
prices, labour costs and foreign and intra-EU exports. 
Imbalances may, for instance, include wage increases 
which are not in line with productivity, or rapidly rising 
house prices which are not in line with overall 
household expenditure.

If excessive imbalances are detected, the Commission 
draws up recommendations — which the Council of 
Ministers addresses to the country concerned — to 
rectify the situation. The government of that country 
then has to establish a corrective action plan. 
Ultimately, sanctions (including fines) can be imposed 
on euro area countries which persistently do not comply 
with the recommendations, while various EU funds can 
be frozen for both euro and non-euro area countries 
(see Excessive imbalance procedure (*)).

4 . STRICTER SUPERVISION OF BANKS: PROTECTING 
THE TAXPAYER

The sovereign debt crisis was intertwined with the 
financial crisis: in the absence of an EU-level framework 
for supervising banks’ behaviour, EU governments had 
to rescue a number of their banks individually and 
haphazardly using taxpayers’ money. That contributed 
to increased debts, recession and, ultimately, a 
prolonged social crisis.

In order to construct a robust framework for regulating 
the financial sector, in 2009 the European Council 
recommended establishing a ‘Single Rulebook’ for all 
banking institutions in the EU single market. Since 
2010, the Commission has proposed nearly 30 
additional measures to ensure that all financial actors, 
products and markets in EU countries are properly 
supervised. New pan-European authorities have been 
set up, partly to assess the ability of banks across the 
EU to withstand potential financial shocks. The purpose 
is to ensure that banks behave responsibly, have 
sufficient lending capacity and can guarantee bank 
deposits made by EU citizens.

However, to break the vicious circle between banks and 
sovereign debts, EU leaders recognised that a stronger 
financial sector alone is not enough, particularly in the 
euro area countries where a more integrated approach 
is necessary. They therefore committed to a banking 
union (*) in June 2012. The Commission has since then 
made proposals for setting it up progressively. The 
European Central Bank will, for example, become the 
chief supervisor of euro area banks as of January 2015. 
Other measures provide for EU instruments for 
restructuring failing banks, including a rescue fund for 
euro area banks, financed by levies on banks at the 
national level. The goal is to ensure that the financial 
sector pays for its own failings rather than calling on 
European taxpayers to foot the bill.

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The EU has taken measures to reform and strengthen its 
financial services sector, with a particular focus on the 
surveillance of banks and the restructuring of banks in 
difficulty (‘banking union’).

THE EUROPEAN UNION EXPLAINED 
17

OUTLOOK

  The way forward: towards a deep and genuine economic 

and monetary union

The series of crises that built up from 2008 in Europe 
and across the globe have arguably been among the 
most hard-hitting since the Great Depression of the 
1930s: a major test for European solidarity and 
integration.

By working together in close cooperation, the European 
Union and EU countries have contained the crisis and 
laid the foundations for economic recovery. They have 
overhauled the economic and monetary union in order 
to ensure financial stability and growth in the EU by 
strengthening economic cooperation and monitoring at 
European level. The European Central Bank played a key 
role through its interest rate policy, thereby reassuring 
the markets. The EU has reinforced its crisis 
management capacity on several fronts, to ensure that 
euro area countries in particular avoid accumulating 
unsustainable debts, deal with economic imbalances 
and do not put taxpayers on the hook for rescuing 
failing banks in the future.

While major progress has been made, the economic and 
monetary union is not yet complete. In 2012, the 
Commission published a Blueprint for a Deep and 
Genuine Economic and Monetary Union as a 
contribution to the ongoing discussions on its future. 
The blueprint sets out ways in which the economic and 
monetary union can be further strengthened over the 
coming years and proposes a calendar for reforms. It 
suggests that the euro area countries integrate more 
quickly and more deeply than the EU at large, whilst 
still leaving it open for other countries to participate in 
the future if they so wish. Concretely it proposes the 
following for the euro area:

—  A banking union, with strict oversight of financial 
markets and banks, to ensure banks behave 
responsibly and to protect the taxpayer;

—  A deeper economic union to underpin the monetary 
union, with targeted investments to boost growth 
and competitiveness, as well as a stronger social 
dimension;

‘Social fairness must go hand-in-hand with sound 
public finances. For instance, a more efficient tax 
system with fewer exemptions or loopholes to 
prevent tax avoidance, can contribute to both 
efficiency and fairness.’ Olli Rehn, European 
Commission Vice-President, Strasbourg, 
13 January 2014.

Whereas the banking union is currently being put into 
place in the euro area countries, deeper economic and 
fiscal union will require changes to the EU treaties. 
Closer cooperation on banking, economic and fiscal 
policies needs to go hand-in-hand with stronger 
mechanisms to legitimise decisions taken in common, 
ensuring the necessary democratic accountability of 
European governments and participation of citizens in 
EU policymaking. In short, a true political union.

The new European Central Bank building in Frankfurt

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—  A fiscal union (*) to ensure sound public finances 

and to deepen financial solidarity between countries 
in times of crisis.

Working together to resolve Europe’s current economic 
problems is the best way to create sustainable growth and 
jobs in all EU countries.

ECONOMIC AND MONETARY UNION AND THE EURO 
 
 
 
 
 
18

Short glossary of technical terms used

Why do we need the economic and 
monetary union  
and the euro?

COMPETITIVENESS — The ability of a country to 
successfully sell its products and services in markets at 
home and abroad, as well as to attract foreign 
investment.

ECONOMIC POLICY — At European level, the 
coordination of economic decisions and reforms (for 
example concerning education, the product market, the 
labour market and pensions) to ensure balanced, 
sustainable and inclusive economic growth. (See also 
‘Europe 2020 strategy’, below)

FISCAL POLICY — Balance between government 
income (through taxation) and government spending, as 
well as the structure and content of taxes and 
expenditure.

MONETARY POLICY — System in which a monetary 
authority (at EU level: the European Central Bank, (ECB)) 
controls money supply by printing banknotes and by 
authorising volumes of coins to be minted by euro area 
countries, and controls inflation by adjusting interest 
rates to ensure price stability.

SINGLE MARKET — Successor to the ‘Common 
Market’ of the 1960s–1970s. Promotes the free 
movement of goods, services, people and capital within 
a single trade block.

What is the economic and monetary 
union in practice?

ECOFIN COUNCIL — EU-level formation of finance 
ministers from all EU countries. Legislates in 
conjunction with the European Parliament on economic 
and financial matters concerning the entire EU.

EUROGROUP — Finance ministers of the euro area 
countries. Discusses all matters concerning the euro 
and the euro area.

EXCESSIVE DEFICIT PROCEDURE — Procedure 
launched by the Commission if an EU country breaches 
either the deficit OR debt limits laid down in the 
Stability and Growth Pact, in order to bring that 
country’s deficits/debts in line with the common targets.

GOVERNMENT BONDS — Loans taken out by national 
governments, which sell bonds to investors in order to 
raise money and pay back their debts. These loans are 
accompanied by a promise to repay the face value on 
the maturity date with, in addition, periodic interest 
payments.

MACRO- AND MICROECONOMICS — 
Macroeconomics concerns the study of large-scale 
economic indicators such as national income, 
unemployment and inflation in order to understand the 
economy as a whole. Microeconomics focuses on 
smaller-scale agents such as companies and consumers 
in specific markets and how their behaviour affects 
supply and demand, and thus prices.

SOVEREIGN DEBT CRISIS — Situation where 
investors, considering that a government will potentially 
fail to pay back its debts on government bonds, demand 
higher and higher interest rates on those bonds, thus 
further deepening the sovereign country’s existing 
deficits and debts.

How is the EU working to boost growth?

ALERT MECHANISM REPORT — The macroeconomic 
imbalance procedure (MIP) is a surveillance mechanism 
that aims to identify potential risks early on, prevent 
the emergence of harmful macroeconomic imbalances 
and correct any existing imbalances. The annual 
starting point of the Procedure is the Alert Mechanism 
Report, based on a scoreboard of indicators.

BANKING UNION — A further step towards economic 
and financial integration in EU and euro area countries, 
with the aim of strengthening and extending the 
regulation and supervision of the banking sector in 
Europe.

THE EUROPEAN UNION EXPLAINED19

EUROPE 2020 STRATEGY — The EU’s growth 
strategy for 2010–20, focusing on ‘smart, sustainable 
and inclusive’ growth. (See http://ec.europa.eu/
europe2020/index_en.htm or the ‘European Union 
Explained’ publication specifically dedicated to the 
Europe 2020 strategy.)

EXCESSIVE IMBALANCE PROCEDURE — Procedure 
launched by the Commission when a euro area country 
presents serious economic imbalances (in terms of 
growth and competitiveness). It is the corrective arm of 
the macroeconomic imbalance procedure, the EU’s early 
warning system which indicates emerging imbalances.

FIREWALL — Mechanism which helps to finance the 
debts of countries facing temporary difficulties in 
borrowing money from financial markets, under strict 
conditions. (See European Financial Stability Facility/
European Financial Stabilisation Mechanism, above).

FISCAL UNION — Sharing a common budget with a 
central fiscal authority, like in the United States. 
Common bonds could finance euro debt rather than 
individual country bonds. This is a long-term vision, as it 
would require a revision of the EU treaties.

EUROPEAN FINANCIAL STABILITY FACILITY  
(EFSF) / EUROPEAN FINANCIAL STABILISATION 
MECHANISM (EFSM) — Two ‘firewalls’ or financial 
support systems, constructed as temporary measures 
for EU countries in difficulty, now replaced by the 
European Stability Mechanism (see below) for any new 
requests for financial support. The ‘Facility’ was set up 
as an emergency fund with a lending capacity of 
€440 billion for euro area countries and is still 
responsible for support schemes previously agreed upon 
for Greece, Ireland and Portugal. It raises funds on 
financial markets which are backed by guarantees of 
the euro area countries. Assistance is given under strict 
conditions based on an economic adjustment 
programme for the country concerned. The ‘Mechanism’ 
allows the Commission to borrow up to €60 billion from 
financial markets, on behalf of the EU, to lend to any 
EU country in difficulty.

EUROPEAN STABILITY MECHANISM (ESM) — 
Established in 2012, the ESM is a permanent 
mechanism for crisis resolution in euro area countries 
which built on the principles behind the EFSF and the 
EFSM (see above), set up as temporary support 
measures. With a lending capacity of up to €500 billion, 
the ESM relies partly on paid-in capital to issue debt 
instruments in order to finance loans and other forms 
of assistance to euro area countries in financial 
difficulty. To be eligible for ESM loans, the country in 
question must first have signed the European ‘Fiscal 
Compact’, after which it must follow a specific 
adjustment programme. Two programmes of that kind 
were approved: in 2013 for Cyprus (with a full economic 
adjustment programme) and in 2012 for Spain (with an 
adjustment programme for Spain’s financial sector).

ECONOMIC AND MONETARY UNION AND THE EURO20

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Find out more

 X For an overview of EU economic and financial affairs: http://ec.europa.eu/economy_finance/index_en.htm 
 X For information on the European Central Bank: http://www.ecb.int 
 X Questions about the European Union? Europe Direct can help: 00 800 6 7 8 9 10 11 

http://europedirect.europa.eu

ISBN 978-92-79-35738-1
doi:10.2775/19726

THE EUROPEAN UNION EXPLAINED