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Economic and monetary union

The economic and monetary union involves the coordination of member states’ economic and fiscal policies alongside a single monetary policy for member states that have introduced the euro. It contributes to economic stability and growth.

How the economic and monetary union works

The economic and monetary union (EMU) is one of the foundations of the European Union. It supports economic stability and growth with high employment and sustainable public finances in the member states.

In practical terms, the EMU involves:

  • economic union: coordination of national fiscal and economic policies on the basis of common rules and recommendations, mostly within the European Semester process
  • monetary union: a single monetary policy for the euro area, set by the independent European Central Bank (ECB)

The EMU is complemented by:

  • banking union: more harmonised rules for the European financial sector, centralised supervision and resolution of banks in the euro area
  • capital markets union: rules promoting private risk sharing and improved access to funding

Who participates in the economic and monetary union?

All EU member states are part of the economic union and together form the single market. They still have control of their economic policies with the exception of monetary policy for those belonging to the euro area, but take their decisions in close coordination, on the basis of EU rules and recommendations.

With its free flow of goods, services, people and capital, the single market complements the EMU.

The 21 member states that have already adopted the single currency – the euro – form the European monetary union.

The EU has set so-called convergence criteria for countries to join the euro area. In order to qualify to enter the euro area, countries need to have:

  • low inflation
  • sustainable public finances
  • stable exchange rates
  • sustainable interest rates

History of the economic and monetary union

The economic and monetary union can be seen as a work-in-progress as it is the result of an ongoing process of economic integration in the EU.

In 1957 the member states decided to build a common market. Over time it became clear that closer economic and monetary cooperation was desirable for the internal market to develop and flourish further.

The decision that the EU should establish an ‘economic and monetary union’, with the euro as its single currency, was formally taken by the European Council in Maastricht (The Netherlands) in December 1991. The EMU’s principles are laid down in the Treaty on the European Union, also known as the Maastricht Treaty.

The EMU was put in place in three stages, with the third phase culminating in the launch of the euro, the single currency, in January 1999. For the first three years, the euro was used as an accounting unit and for electronic payments only. Euro coins and banknotes were launched on 1 January 2002.

Deepening the economic and monetary union

Following the sovereign debt crisis which unfolded in 2009-2010 in the wake of the financial crisis, and which exposed missing aspects in the governance of the euro area, the EU took measures to strengthen its economic and monetary union.

It was decided to:

  • establish the European Stability Mechanism
  • improve the economic governance framework
  • launch a banking union

During the sovereign debt crisis, a number of euro area member states received financial assistance loans accompanying adjustment programmes. Initially, these loans were provided through temporary instruments. However, in 2012, the European Stability Mechanism (ESM) was established as a permanent instrument. It may provide financial assistance to countries of the euro area that are experiencing financial distress which could pose risks to other member states or the euro area as a whole.

The EU overhauled its economic governance framework in 2011 and 2013 in order to prevent and, where necessary, correct, fiscal and macroeconomic imbalances. The new rules became known as the ‘six-pack’ and the ‘two-pack’ legislation respectively, due to the number of legal acts adopted each time. This included strengthening the common fiscal rules of the Stability and Growth Pact.

Launch of the banking union

The Euro Summit of June 2012 recognised the need for a well-functioning and stable banking sector, in particular for the euro area. EU leaders took the decision to launch a banking union. With the banking union, the EU wants to promote financial integration and ensure that non-viable banks are not rescued using taxpayers money.

The banking union started with the centralisation of the supervision of large banks at the European Central Bank through the establishment of the Single Supervisory Mechanism (SSM). Later on, by creating the Single Resolution Mechanism (SRM), a second pillar was added, which centralised bank resolution.

The Five Presidents’ report

In 2015, the presidents of the European Council, the European Commission, the European Parliament, the European Central Bank and the Eurogroup published a report which outlined a roadmap for the EMU, also known as the ‘Five Presidents’ report’.

The EU implemented a number of the report’s recommendations in the months following its publication. This included:

  • the establishment of a European Fiscal Board
  • the start of discussions on the completion of the banking union, including a European deposit insurance scheme
  • a capital markets union action plan

In December 2017, leaders identified the completion of the banking union and the further development of the ESM as priority areas. In December 2018, they considered a ‘budgetary instrument for convergence and competitiveness’ (BICC) for the euro area.

Further developing the ESM

Following the mandate received by euro area leaders at the Euro Summit of December 2018, the Eurogroup worked on a revised ESM treaty until June 2019. The changes provide for a more effective and flexible use of the European Stability Mechanism (ESM), including:

  • a more accessible ESM precautionary credit line for member states that may be in need of financial support
  • a stronger role for the ESM in economic crisis prevention and management in the euro area
  • a more transparent approach to the assessment of member states’ public debt sustainability
  • a credit line, or ‘common backstop’, to the banking union’s Single Resolution Fund

In November 2020, the national ratification processes started. The revised ESM Treaty will enter into force once all euro area member states have ratified it.

A common budgetary instrument

In June 2019, the Eurogroup also agreed on the main features of the BICC for the euro area, and for member states of the EU’s exchange rate mechanism (ERM II) on a voluntary basis. The EU set up the exchange rate mechanism (ERM II) on 1 January 1999 as a successor to the ERM. The ERM II ensures that exchange rate fluctuations between the euro and other EU currencies do not disrupt economic stability within the single market. It also helps countries prepare to join the euro area.

The BICC was intended to provide financial incentives for structural reforms and public investments in order to strengthen the potential growth of euro area economies and the resilience of the single currency against economic shocks.

The work on the BICC was suspended when the COVID-19 pandemic broke out in 2020. However it served as inspiration for the Recovery and Resilience Facility (RRF), which is the centrepiece of the temporary Next Generation EU recovery plan.

The programme provided member states with sizable EU grants and loans to support investment and the reforms needed to support their economies after the pandemic and to implement the green and digital transition. Overall, the EMU proved to be more resilient than a decade earlier.

Completing the banking union

In 2021 and 2022, the Eurogroup resumed discussions on the completion of the banking union. Ministers looked into issues such as crisis management, deposit insurance, cross-border integration, and financial stability safeguards.

In June 2022, the Eurogroup adopted a statement on the future of the banking union. Ministers agreed that, in the immediate, work should focus on strengthening the common framework for bank crisis management and deposit insurance (CMDI) schemes.

The Commission followed up on this in April 2023 by presenting a legislative proposal to further strengthen the EU's CMDI framework, with a focus on medium-sized and smaller banks.

Major reform of the economic governance framework

The recovery from the COVID-19 pandemic and the consequences of Russia’s war of aggression against Ukraine have posed new challenges for the EU economy, against a backdrop of higher debt levels and interest rates and new investment and reform goals. The EU has therefore further updated its economic governance framework to make it fit for the future.

The main objective of the reform is to ensure sound and sustainable public finances, while promoting sustainable and inclusive growth in all member states through reforms and investment.

On 29 April 2024, the Council adopted the package of legislation reforming the EU’s economic and fiscal governance framework. The new rules entered into force on 30 April 2024.

Looking ahead

The EU institutions and the member states continue working to adapt the EMU to a changing world and needs.

Work is also underway on the possible creation of a digital euro.

See also

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Last review: 1 January 2026