The Federated States of Micronesia (FSM) is situated in the western Pacific Ocean, and consists of a series of 607 small islands scattered over 3 million km². The majority of the population of 108,000 relies on subsistence farming and fishing. Because migration to urban areas is increasing and most economic development is limited to urban centres, there is growing inequality between regions.

The islands face many development challenges common to the smaller island-states of the region. These include: the small size of the country and population; the isolation from each other and from other regions, aggravated by a poor communications infrastructure; lifestyle diseases, like obesity, stress, heart disease and diabetes; and vulnerability to natural disasters and climate change, especially the threat of more frequent and violent tropical cyclones and rising sea levels. The country relies heavily on imported fuel for its energy needs, unlikely to be sustainable in the longer term.

Key issues in EU- Federated States of Micronesia relations

FSM is one of the newer members of the group of African, Caribbean and Pacific states, having joined during the 9th European Development Fund (EDF), which ran from 2002-07. Relations are mostly conducted through the EC delegation based in Suva, Fiji.

Development cooperation under the 9^th EDF focused on addressing the basic energy needs of the population in rural areas/outer islands.

Under the 10^th EDF, FSM and the EU signed a new Country Strategy Paper in October 2007 for 2008–13, with a total budget of € 8.3 M.

The strategy once again focuses on the water and energy sector, specifically renewable energy. In practice, this will entail the supply and installation of renewable energy systems in rural areas/outer islands. By providing cost-effective and reliable renewable energy, and promoting energy efficiency and self-sufficiency, the strategy will assist in addressing the regional imbalances, reduce costs and contribute to a cleaner environment, one of FSM's most importance resources.

FSM has a huge Exclusive Economic Zone, and fish is an extremely important asset. However, development of a fisheries industry faces several environmental challenges, including over-fishing, destructive fishing practices, waste, pollution, poorly managed coastal development and climate change.

Given the importance of this sector, an EU–FSM Fisheries Partnership Agreement came into force in February 2007. Part of the EU’s financial contribution will assist FSM in the definition and implementation of a fisheries policy, which will in turn help it to manage its fisheries resources in a sustainable and responsible way. The agreement will also combat illegal, unreported and unregulated fishing activities in the FSM.