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Does it mean "reducing the member countries of the EU"?

With previous opinion polls also showing such opposition, Le Pen has said for months that if elected she would not abruptly withdraw from the euro but instead hold a referendum after six months of negotiation with the rest of the EU on a range of issues including leaving the border-free Schengen agreement and reducing the EU to a loose cooperative of nations.

Source: http://www.cnbc.com/2017/03/26/france-marine-le-pen-euro-exit-wouldnt-be-chaos.html

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The phrase typically implies degradation, or making something less to some degree than it was before. In your example, by saying the EU was "reduced to a loose cooperative of nations," we can assume that the EU was not previously (or currently) a loose cooperative of nations, but would or could become one. The phrase usually has a negative connotation.

A more abstract example might be, "An explosion reduced the city to rubble." The city was not previously rubble, but the explosion made it so, and rubble is less than a city. Hope this helps.

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It is not about the number of countries, but the connections between them - taking back some privileges currently held by EU.

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