European economic and monetary integration
Development of economic and monetary union
The first serious attempt to create a monetary union among EEC members took place in the early 1970s (the “Werner Plan”). According to this plan, a monetary union was to become a reality within ten years. The plan proposed establishing a European Central Bank and transferring many fiscal powers of the Member States to the European level. However, due to a number of adverse circumstances (the collapse of the Bretton Woods system, the oil shock, rising inflation, economic stagnation, etc.), the plan was not implemented.
At the end of the 1970s, the European Monetary System was established and officially commenced operations in 1979. Its key elements included the Exchange Rate Mechanism (ERM), which was used to keep the exchange rates of participating currencies within a narrow band without major fluctuations. Another element was the European Currency Unit (ECU), an artificial currency unit constructed as a basket of the currencies of all EEC Member States. The ECU served as an accounting unit for EEC institutions and as a reserve currency used by central banks for foreign exchange market interventions.
The European Monetary System contributed significantly to the convergence of economic policies and became the basis for the second attempt to create a monetary union, the outlines of which were set out in the Delors Report of 1989. The report emphasised that only the creation of an area with a single currency would ensure full use of the benefits of the internal market. The monetary union was to be established in three stages. The Delors Report was followed by an intergovernmental conference, whose main outcome was agreement on the Maastricht Treaty, which entered into force in 1993 and defined the basic framework for further progress towards a single currency.
In the first stage of establishing the Economic and Monetary Union (EMU) in the late 1980s and early 1990s, the main objective was to introduce the free movement of capital between the Member States of the European Communities and to strive for economic convergence, meaning the alignment of levels of economic development and macroeconomic stability across individual Member States. At the same time, cooperation between central banks was strengthened, primarily in terms of coordinating economic policy and removing barriers to the free movement of capital. During this period, some differences in economic developments caused difficulties within the European Monetary System (such as exchange rate fluctuations), which resulted in wider permitted exchange rate margins within the system.
A key development of the second stage of establishing Economic and Monetary Union (EMU) in the 1990s was the creation of the European Monetary Institute (EMI), tasked with coordinating the steps required to establish the European Central Bank and to prepare for the introduction of the single currency. During this stage, Member States worked intensively to meet the convergence criteria – the conditions required for entry into the euro area, which include price stability, exchange rate and interest rate stability, and ensuring the sustainability of public finances. Emphasis was also placed on aligning economic policies and making institutional preparations for the introduction of the single currency. During this period, the Stability and Growth Pact was prepared and adopted.
In the third stage (from the late 1990s), the single currency – the euro – was introduced. Irrevocable exchange rates were set between the national currencies of the countries that adopted the euro, symbolically completing economic and monetary integration within the euro area.
Since the creation of the euro area (external link) in 1999, its monetary policy has been determined by the ECB, while fiscal policy has remained the responsibility of individual Member States and is coordinated jointly. Representatives of euro area Member States regularly discuss euro-related matters within the Eurogroup, an informal body of euro area finance ministers with no legislative powers. The Eurogroup is also responsible for preparing euro summits. The central banks of euro area countries and the ECB together form the Eurosystem.
During its first three years of existence, the euro was used only in non-cash form. Of the 15 EU members at the time, 11 adopted the euro for non-cash transactions in 1999. Greece joined this group in 2001. In 2002, euro banknotes and coins were introduced in these countries. The euro area gradually expanded to include Slovenia (2007), Malta and Cyprus (2008), Slovakia (2009), Estonia (2011), Latvia (2014), Lithuania (2015), Croatia (2023) and Bulgaria (as of 1 January 2026). These countries adopted the euro under the “big bang” scenario without a transitional non-cash period.
Countries such as Andorra, Monaco, San Marino and the Vatican have adopted the euro as their national currency under special agreements with the EU, which allow them to issue euro coins in limited amounts, although they are not members of the euro area. On the basis of unilateral decisions and without a contractual framework, Kosovo and Montenegro also use the euro, following their previous use of the Deutsche Mark, which ceased to exist when Germany adopted the euro.
Deepening Economic and Monetary Union
A major impetus for further deepening Economic and Monetary Union was the global financial crisis of 2008, which exposed certain shortcomings in the existing architecture of the euro area and the EU. In response to financial market shocks and debt sustainability problems in some Member States, a series of measures were adopted to strengthen the resilience and stability of the euro area, the economies of EU Member States and European financial markets.
The most significant measures included the establishment of the European System of Financial Supervision (ESFS), the introduction of the European Semester for coordinating fiscal, economic and social policies of EU Member States, the reform of the Stability and Growth Pact to strengthen the fiscal responsibility of Member States and the creation of the European Stability Mechanism (ESM) for euro area countries facing financial difficulties that threaten the stability of the monetary union itself. Supervisory and resolution powers over the banking sector of the banking union countries were also transferred to the EU level. Later, efforts to complete the banking union were complemented by initiatives to remove barriers to the free movement of capital and financial services in order to mobilise private capital needed to finance the EU’s current policy priorities, culminating in the initiative to establish the capital markets union and, as of 2025, the savings and investment union.
In response to the financial crisis of 2007–2009, the European System of Financial Supervision (ESFS) was established in the EU in 2011 under Articles 114 and 127(6) of the Treaty on the Functioning of the European Union (TFEU). Its purpose is to ensure consistent and coherent financial supervision across the EU. It comprises the European Systemic Risk Board (ESRB, external link), the three European Supervisory Authorities (EBA (external link), ESMA (external link) and EIOPA (external link)), and the national supervisory authorities of the Member States.
The main objective of the ESFS is to ensure that rules for the financial sector are properly implemented in all Member States in the interests of maintaining financial stability, strengthening confidence and providing consumer protection. Other objectives include fostering a common supervisory culture and facilitating the functioning of the EU’s single financial market.
The ESFS combines microprudential and macroprudential supervision. The primary goal of microprudential supervision is to reduce the likelihood of individual financial institutions failing, limit the impact of such failures and thereby protect customers. Macroprudential supervision focuses on the exposure of the financial system as a whole to common risks and seeks to prevent it from becoming distressed, thereby protecting the entire economy from a significant decline in real output.
The global financial crisis revealed that the EU’s pre-crisis supervisory architecture placed too much emphasis on the supervision of individual financial institutions and insufficient focus on macroprudential aspects. Consequently, the ESRB was established and entrusted with responsibility for macroprudential oversight of the EU financial system and for preventing and mitigating systemic risk.
The European Semester (external link) is a framework for coordinating the fiscal, economic and social policies of EU Member States. Its purpose is to ensure compliance with the rules of Economic and Monetary Union, to assess the state of economic and social policies in each EU country on an annual basis, and to present recommendations for improvement. The European Semester begins with the publication of the Autumn Package by the European Commission along with a set of documents that include the analytical Annual Sustainable Growth Strategy, the Employment Report, the Alert Mechanism Report on macroeconomic imbalances, and the Commission’s opinions on the draft budgets of euro area Member States.
Member States also prepare outputs within the European Semester based on communication with the European Commission. These include multiannual fiscal-structural plans (typically covering four years, or up to seven years in justified cases) and annual progress reports. After the fiscal-structural plans and progress reports are submitted, the Commission issues the Spring Package of the European Semester, which includes analytical reports for each Member State (Country Reports) and proposals for the Council of the EU on the Country-Specific Recommendations in the areas of fiscal, economic and social policies.
The Stability and Growth Pact (SGP, external link) is the cornerstone of the EU’s fiscal framework, designed to ensure stability and fiscal responsibility in the euro area and EU Member States. The SGP rules, which entered into force in 1998–1999 and have since been amended several times, set limits for the budgetary policies of EU Member States in an effort to prevent excessive indebtedness that could jeopardise the stability of the monetary union.
The basic principles of the SGP require Member States to maintain budgets close to balance or in surplus over the medium term, assessing the overall fiscal trajectory rather than annual budgetary outcomes. The SGP rules are binding for all EU Member States, except that financial sanctions may only be imposed on euro area members.
The SGP consists of two components. The preventive arm focuses on averting excessive deficits and public debt through regular monitoring of Member States’ budgetary plans, setting medium-term budgetary objectives and implementing preventive measures. Under the preventive arm, Member States must regularly submit their budgetary plans (multiannual fiscal-structural plans and progress reports) to the European Commission, which provides guidance on fiscal consolidation before these plans are prepared. For Member States exceeding the SGP reference values – i. e., a budget deficit of 3% of GDP and government debt of 60% of GDP – the guidance is more detailed and includes the establishment of a reference trajectory, which sets a specific timeline for gradually reducing the deficit or debt to a sustainable level.
The corrective arm of the SGP governs procedures when a Member State breaches the rules and runs an excessive deficit. Corrective measures are adopted by the Council of the EU on the recommendation of the European Commission when reference values are exceeded under the Excessive Deficit Procedure. In extreme cases, the Council may impose financial sanctions in the form of a non-interest-bearing deposit with the Commission of up to 0.5% of GDP, which may be converted into a fine if the excessive deficit persists for more than two years. In cases of continued non-compliance, additional fines of up to 0.05% of GDP every six months may be imposed until the Member State takes effective corrective action. In practice, however, these sanctions have never been applied to any Member State.
Until the 2024 reform of EU economic governance, Member States were required, under the Excessive Deficit Procedure, to reduce their debt by one-twentieth of the difference between their current debt level and 60% of GDP (the “one-twentieth rule”). Applying this rule to the most indebted euro area countries required significant annual consolidation, which proved difficult to implement and enforce in practice.
Starting in 2025, the latest SGP reform replaced the previous “one-twentieth rule” with a new net expenditure path rule, which assesses the growth of net budgetary expenditure based on estimated medium-term economic growth and excludes certain expenditures (primarily those caused by the economic cycle) from debt calculations. However, when the reference value for the budget deficit (3% of GDP) is exceeded, the requirement for annual deficit consolidation of at least 0.5% of GDP remains unchanged even after the reform. From 2025, the SGP rules were further made more flexible by allowing Member States to apply a national exemption permitting a temporary breach of the SGP reference values by up to 1.5% of GDP in connection with defence spending.
The European Stability Mechanism (ESM, external link) provides financial assistance to euro area countries facing severe financial difficulties when the financial stability of the monetary union is at risk. The ESM was established in 2012 in response to the sovereign debt crisis affecting some euro area countries as an intergovernmental international organisation whose members are all euro area countries. The ESM’s subscribed capital amounts to over EUR 708 billion (of which almost EUR 81 billion is paid-in capital from Member States and the remainder is callable capital), enabling it to provide financial assistance of up to EUR 500 billion (its “lending capacity”). To alleviate difficulties faced by Member States, the ESM has a range of instruments, from direct loans and credit lines to the purchase of Member State bonds and recapitalisation programmes for banking sectors affected by crises.
To date, the ESM or its predecessor, the European Financial Stability Facility (EFSF), has activated loan programmes conditional on the implementation of structural reforms, which were directed at Ireland, Cyprus, Portugal and Greece. In the case of Spain, the ESM activated an instrument for the indirect recapitalisation of its banking sector. During the coronavirus crisis in 2020, the ESM established a special credit line for euro area Member States, which, however, was not used.
The ESM’s highest decision-making body is the Board of Governors, which typically consists of the finance ministers of ESM Member States. The Board of Governors usually meets only once a year. A number of decision-making powers are therefore exercised by the Board of Directors, which consists of representatives of ESM Member States, typically at the level of deputy ministers or other senior officials of their finance ministries. The day-to-day operations of the ESM are managed by the Managing Director, who is appointed by the Board of Governors and chairs meetings of the Board of Directors. In carrying out his or her duties, the Managing Director is assisted by the Management Board, which is appointed by the Managing Director under conditions set by the Board of Directors.
The banking union (external link) is one of the most prominent, albeit still incomplete, EU integration initiatives since the introduction of the single currency. It was established in 2014 in response to the financial and sovereign debt crisis and is primarily (though not exclusively, see below) intended for euro area countries. Its aim is to ensure the safety and soundness of the banking sector, strengthen financial stability and ensure that the costs of resolving potential problems in financial institutions are borne primarily by their shareholders and creditors rather than taxpayers.
The banking union consists of several main pillars. The first pillar is the Single Supervisory Mechanism (SSM, external link), which has been operational since November 2014 and in which the ECB plays a central role. The second pillar, the Single Resolution Mechanism (SRM, external link), has been operational since January 2016 and comprises the Single Resolution Board (SRB), which decides on the application of resolution tools for significant cross-border banking groups, and the Single Resolution Fund (SRF, external link). The SRF is funded by bank contributions to cover resolution costs and, under existing agreements, is expected to be backed by public resources (the European Stability Mechanism) in the future. The third pillar of the banking union, the European Deposit Insurance Scheme (EDIS), has not yet been agreed by Member States, and negotiations are still ongoing. The final pillar is the Single Rulebook, a set of legal provisions governing capital requirements for credit institutions, national deposit guarantee schemes and bank resolution frameworks.
While the common rules (Single Rulebook) apply to all EU Member States, only euro area countries automatically participate in the SSM and SRM. EU Member States outside the euro area may request to join the SSM and SRM on a voluntary basis. The first two non-euro area countries to do so were Bulgaria and Croatia in 2020. Both committed to joining the banking union before adopting the euro after this step was deemed essential by EU institutions, euro area countries, and ERM II participants, despite the absence of explicit legal grounds for such a requirement in EU legislation.
The Single Supervisory Mechanism was launched in 2014. It consists of the ECB and the national supervisory authorities of banking union member states. Its core principle is the transfer of supervisory powers over systemically important banks in participating countries from the national supervisory authorities to the ECB. The participating national authorities continue to supervise less significant institutions under ECB rules and guidelines, although the ECB may decide at any time to assume direct supervision of these institutions. A bank’s significance is determined by its size, its importance to the economy and the extent of cross-border activities. The ECB is responsible for the functioning of the system as a whole, with the Supervisory Board as its main body for carrying out tasks in this area.
The Single Resolution Mechanism was launched in 2016 and consists of the Single Resolution Board (SRB, external link) and the national resolution authorities of banking union member states. Its goal is to ensure the orderly resolution of problems in the event of bank failure without jeopardising financial stability and causing broader damage to the economies of participating countries. The SRM applies to banks within the scope of the SSM and covers significant institutions under direct ECB supervision as well as all cross-border banking groups.
The essence of the SRM, as with the SSM, is the transfer of decision-making powers in the area of bank resolution from participating countries to the banking union level, represented in this area by the SRB. The SRB prepares resolution plans, assesses resolvability, proposes early intervention measures, sets the minimum amount of own funds and eligible liabilities for write-down in resolution and designs resolution strategies using the appropriate tools and the Single Resolution Fund (SRF). The SRF is financed by contributions from the banking sectors of participating countries and its target level (reached at the end of 2023) is set at 1% of covered deposits (approximately EUR 75 billion by the end of 2023). In the event of insufficient funds in the SRF, a common backstop has been established in the form of a credit line from the European Stability Mechanism (ESM), which, at up to EUR 68 billion, is close to the SRF’s target level. Ratification of the relevant agreements is currently under way.
The objective of the capital markets union (CMU, external link) is to promote deeper economic integration and create a single capital market within the EU. Its aim is to broaden and reduce the cost of financing options for European companies, particularly small and medium-sized enterprises, regardless of the Member State in which they operate. The CMU is also intended to expand the range of financial instruments available to EU investors and remove cross-border barriers to investment within the EU.
The proposal to establish the CMU was first presented in 2015. The European Commission subsequently issued a series of legislative proposals aimed at harmonising financial market rules and adjusting operating conditions to achieve the stated objectives. The discussions also include politically sensitive considerations regarding the possible transfer of supervisory powers over the capital market to the EU level and further harmonisation of insolvency and tax law. Member States hold differing views on these issues, which affect progress in building the CMU. In 2025, in an effort to give new impetus to the negotiations, the CMU was transformed into the savings and investments union (SIU), and its scope was expanded to include retail investors and EU-wide savings and investment products.
The savings and investments union (SIU, external link) is an overarching initiative introduced by the European Commission in 2025, encompassing areas covered by the capital markets union and the banking union. The SIU strategy now focuses on channelling savings into productive investments and increasing the number and diversity of financial opportunities for citizens (investment) and businesses (capital raising). At the same time, it aims to contribute to financing the EU’s strategic objectives (the green transition, digitalisation and defence) and to strengthening the EU’s competitiveness. The strategy comprises a set of legislative and non-legislative measures to be implemented at EU level, followed by complementary measures adopted at national level.