BY GRACE YOU HAVE BEEN SAVED
If there was ever a favorite passage for a Protestant to spring upon a Catholic it would undoubtedly be Ephesians 2:8-9, "For by grace you have been saved through faith; and that not of yourselves, it is the gift of God; not as a result of works, so that no one may boast." What should a Catholic do when they see a passage that so clearly removes works from the salvation equation and places the emphasis entirely on faith? Most Catholics would immediately counter with James 2:24, without realizing their biggest ally is in Ephesians 2 itself.
The most important thing a Catholic needs to be aware of is how terms are defined. Terms such as grace, saved, faith, and works are actually defined very differently by Protestants and Catholics. Failing to understand the critical distinctions often leads Catholics into misunderstanding what Protestantism is teaching, and being unable to accurately convey what Catholicism really teaches. The following are the basic definitions:
The biggest, and most decisive difference is the definition of grace. The Catholic Church teaches that there are two types of grace: sanctifying and actual . Actual graces are those graces which prompt and assist us in doing good works. Sanctifying grace is a divine quality that is infused into our soul and makes our soul partakers of God's Divine Life (2 Pt 1:4; Rom 5:5; Jn 14:23). This grace makes our souls alive and pleasing in God's sight, and confers upon us Divine adoption. Protestants (who have little trouble with the concept of actual grace) are flatly against the concept of sanctifying grace. For Protestants, grace is essentially God's favor bestowed upon the individual, though not on the basis of anything in them, it a purely external favor.
The second issue concerns the definition of saved, which is critically dependent on how grace is understood. The term "saved" (in many contexts, such as Eph 2:8) is a synonym for justification, a claim which Protestants readily agree upon. Catholicism teaches that justification begins with the infusion of sanctifying grace into a soul which previously lacked this grace.  With sanctifying grace infused, the soul, though previously "dead," is now alive in a manner we can hardly imagine. It becomes intimately united to God which makes us truly righteous and adopted children of God. Protestantism, on the other hand, sees justification as a forensic (legal) event where man stands as a guilty criminal  before God (the Judge) who, instead of declaring them guilty, accepts them as righteous in His sight by counting the Righteous life Christ lived in place of the sinner's guilty record. In the eyes of the Judge, and the law, that guilty criminal is not only no longer seen as guilty, but they are now seen as a perfect law keeper (perfectly righteous) because Christ kept the whole law perfectly. 
Most Catholics (and Protestants) think the salvation dispute is a matter of "faith alone" versus "faith plus works," yet this is only partly true. In fact, if one doesn't understand the distinctions between how each side understands grace (and consequently salvation) then they are missing the bigger picture. To fail to grasp the seriousness of the issue of grace, above and beyond "faith versus works," would be like two men arguing whether it it is better to ride a bicycle or take a taxi without realizing each man actually has a different destination in mind (or, worse yet, has no destination in mind).
Each side wants to know what needs to be done in order for this grace to be bestowed upon them for justification. For Protestants the question is whether they can try to make themselves righteous in the eyes of the law by their own works, or whether they have to trust, by faith, that someone else who was already righteous was gracious enough to stand in their guilty place. The answer, for Protestants, is simple. Since man is born guilty in the eyes of the law they cannot by their own works make themselves righteous by keeping the law which demands perfection, so the only alternative is to believe that someone else, Christ Himself, fulfilled these legal obligations in their place. Through this faith the "Righteousness of Christ" is counted to be the sinner's own. For Catholics the question is very different. The question here is how an orphaned child (spiritually dead and in bondage to sin) can be reunited to their father, and, in due time, receive their inheritance. Since a place in the family cannot be bought back like property (works of law) it can only come by way of reconciliation with God, especially through the intercession of the good Son (Jesus) arranging for the reunion with the Father and the orphaned children. The children are spiritually cleaned and given a place in the family through Baptism (which is the channel by which sanctifying grace enters the soul) and they are now adopted children and heirs to the Father's estate, provided they remain in family (do not abandon the Father) and that they grow up and mature in their love for the Father (through good works).
At this point it is important to point out that Protestants firmly believe in the Biblical teaching of the Christian receiving the gift of adoption and growing in love of God by good works, just as Catholics do, but Protestants don't believe this has a place under the category of justification. Protestants believe these things occur during "sanctification," which they say begins immediately after the legal decree of "righteous" has been pronounced at the moment of justification. Protestants believe the right things for the wrong reasons, and in the wrong order, resulting in many erroneous (even heretical) conclusions. The most significant of these errors is at the moment of justification God is declaring someone righteous who is in fact unrighteous. Worse yet, this leads many (but not all) Protestant groups to conclude that salvation cannot be lost (contrary to the clear warnings of Scripture) because even if a Christian were to unfortunately fall into grave sin their "righteous standing" before God remains unchanged because it is external to themselves.
The Context of Ephesians Chapter 2:
The context of Paul's thought for Ephesians 2:8 begins at the end of chapter 1 and continues through the end of chapter 2:
[Ch1]18I pray that the eyes
of your heart may be enlightened, so that you will know what is the
hope of His calling, what are the riches of the glory of His
inheritance in the saints, 19and
what is the surpassing greatness of His power toward us who believe.
These are in accordance with the working of the strength of His might 20which He brought about in Christ, when He raised Him from the dead and seated Him at His right hand in the heavenly places, 21far
above all rule and authority and power and dominion, and every name
that is named, not only in this age but also in the one to come. 22And He put all things in subjection under His feet, and gave Him as head over all things to the church, 23which is His body, the fullness of Him who fills all in all. [Ch2] 1And you were dead in your trespasses and sins, 2in
which you formerly walked according to the course of this world,
according to the prince of the power of the air, of the spirit that is
now working in the sons of disobedience. 3Among
them we too all formerly lived in the lusts of our flesh, indulging the
desires of the flesh and of the mind, and were by nature children of
wrath, even as the rest. 4But God, being rich in mercy, because of His great love with which He loved us, 5even when we were dead in our transgressions, made us alive together with Christ (by grace you have been saved), 6and raised us up with Him, and seated us with Him in the heavenly places in Christ Jesus, 7so that in the ages to come He might show the surpassing riches of His grace in kindness toward us in Christ Jesus. 8For by grace you have been saved through faith; and that not of yourselves, it is the gift of God; 9not as a result of works, so that no one may boast. 10For
we are His workmanship, created in Christ Jesus for good works, which
God prepared beforehand so that we would walk in them. (NASB)
Most people focus on verses 8-9, and verse 10, to the virtual exclusion of the preceding context. Paul starts off talking about the power of God which operated in Christ to raise Him up physically from the dead and seated Him at the Father's right hand. Then, Paul immediately takes this important concept and applies it to us, who were originally spiritually dead and under the bondage of the forces of darkness. Chapter 2 reaches its climax at verse 5, and not at verse 8. Paul says the same power of God which operated in Christ's dead body made us spiritually alive and raised us up, and this is how Paul defines "by grace you have been saved"! Going back to the two understandings of grace and saved (justified) above, which understanding fits best the teaching of Paul? Is Paul describing a legal decree of righteousness and a grace of external favor? Quite the contrary. As the Catholic Church teaches we are saved when we are spiritually resurrected and this is effected by the grace of God (His life-giving power) within us.  But Paul is not finished, for he continues:
11Therefore remember that formerly you, the Gentiles in the flesh, who are called "Uncircumcision" by the so-called "Circumcision," which is performed in the flesh by human hands--12remember that you were at that time separate from Christ, excluded from the commonwealth of Israel, and strangers to the covenants of promise, having no hope and without God in the world. 13But now in Christ Jesus you who formerly were far off have been brought near by the blood of Christ. 14For He Himself is our peace, who made both groups into one and broke down the barrier of the dividing wall, 15by abolishing in His flesh the enmity, which is the Law of commandments contained in ordinances, so that in Himself He might make the two into one new man, thus establishing peace, 16and might reconcile them both in one body to God through the cross, by it having put to death the enmity. 17And He came and preached peace to you who were far away, and peace to those who were near; 18for through Him we both have our access in one Spirit to the Father. 19So then you are no longer strangers and aliens, but you are fellow citizens with the saints, and are of God's household, 20having been built on the foundation of the apostles and prophets, Christ Jesus Himself being the corner stone, 21in whom the whole building, being fitted together, is growing into a holy temple in the Lord, 22in whom you also are being built together into a dwelling of God in the Spirit.
While it is very obvious there is "legal language" here
(circumcision, commandments, ordinances, etc), looking closely, the
real theme here is a family reunion, alienated children being
reconciled to their God. The major theme here is adoption by the
indwelling of the Holy Spirit (v18,22), the minor theme is the Law. The
plan of salvation is first and foremost about becoming adopted children
of God (which Adam lost for us), while the interlude of the Law between
Moses and Jesus - which temporarily divided Jews and Gentiles - is only
part of realizing that plan.
This realization of what chapter 2 really teaches
is devastating to the Protestant position and undermines any appeal to
verse 2:8f as a "faith alone" proof text. With this solidly Catholic
foundation in place we can now look at verses 2:8-10, and, from there
onward, other key texts of Ephesians will be considered.
Beginning with verse 8 we need to look at what Paul means here by faith, and, most especially, if it excludes acts such as Baptism. There is nothing here indicating this faith is trusting in Christ's Righteous life to be counted to our record, so, thus far, the primary understanding of faith by Protestantism is without foundation. Ephesians 3 gives some insight on what faith does:
14For this reason I bow my knees before the Father, 15from whom every family in heaven and on earth derives its name, 16that He would grant you, according to the riches of His glory, to be strengthened with power through His Spirit in the inner man, 17so that Christ may dwell in your hearts through faith; and that you, being rooted and grounded in love,
Paul is concluding his thoughts from a very important insight into the "mystery of Christ...that the Gentiles are fellow heirs and fellow members of the body, and fellow partakers of the promise in Christ Jesus through the gospel" (3:4ff). Verses 16-17 describes nicely the Catholic concept of sanctifying grace, the indwelling of God's life and power in your heart. The Bible further supports this elsewhere when it talks about what faith does at the moment of being saved, it makes mention of "cleansing their hearts by faith," and being "sanctified by faith" (Acts 15:9-11; 26:18; 2 Thes 2:13).
Though chapter 2 does not mention baptism explicitly is good to compare it with Colossians 2:
11and in Him you were also circumcised with a circumcision made without hands, in the removal of the body of the flesh by the circumcision of Christ; 12having been buried with Him in baptism, in which you were also raised up with Him through faith in the working of God, who raised Him from the dead. 13When you were dead in your transgressions and the uncircumcision of your flesh, He made you alive together with Him, having forgiven us all our transgressions, 14having canceled out the certificate of debt consisting of decrees against us, which was hostile to us; and He has taken it out of the way, having nailed it to the cross. 15When He had disarmed the rulers and authorities, He made a public display of them, having triumphed over them through Him.
The comparison between Colossians 2:11ff and Ephesians 2 is amazing, in that it is essentially a summary of Ephesians chapter 2. In Ephesians the emphasis is on circumcision made "by human hands," while in Colossians the emphasis is on circumcision "without hands," which is a spiritual circumcision of the heart (Rom 2:29). This "circumcision" occurs, as verse 12 shows, by baptism and faith (faith in God's power and revelations). There is no wedge between baptism and faith in Paul's mind, but Protestant theology is forced to create one because faith alone is the only instrument by which grace and salvation comes. This realization also explains passages like 1 Pt 3:21, "baptism now saves you," which the Protestant has a hard time explaining (the term "save" in 1 Pt 3:21 is just as much a reference to justification as "save" in Eph 2:8 is). Next, it should be noted that Ephesians 4:5 (in the context of being called to become a Christian) makes mention of baptism ("one Lord, one faith, one baptism") so the idea that Ephesians 2:8f is excluding acts like baptism is without foundation. One final passage to consider is Romans 6:
3Or do you not know that all of us who have been baptized into Christ Jesus have been baptized into His death? 4Therefore we have been buried with Him through baptism into death, so that as Christ was raised from the dead through the glory of the Father, so we too might walk in newness of life. 5For if we have become united with Him in the likeness of His death, certainly we shall also be in the likeness of His resurrection, 6knowing this, that our old self was crucified with Him, in order that our body of sin might be done away with, so that we would no longer be slaves to sin; 7for he who has died is freed from sin.
The same theme of spiritual death and resurrection likened to
Christ's physical death and resurrection runs throughout Paul's thought
and teaching. Here Paul explicitly places baptism front and center of
this message, solidifying the notion that faith and baptism are two
sides of the same coin. What is even more noteworthy at this point is
in verse 7, the term "freed" is actually the same Greek word for
"justify". This is
explicit proof that "justify" can and, in the context of salvation,
does mean an transformation inside the soul (infusion of sanctifying
grace). The same thing is taught in Titus 3:4-7. The way Catholics (and
Paul) see it, faith in the truths of the Gospel leads to the baptismal
font, and at the moment of baptism you become saved (justified), there
is no power struggle or wedge between faith and baptism.
Finally comes an examination of the passage in verse 2:9, "not as a result of works, so that no one may boast."
What are the "works" and "boasting" in reference to here? Obviously,
first and foremost, the "works" Paul is speaking of is physical
circumcision (v2:11), which also implies formal obedience to the entire
Mosaic Law. It is a popular belief among Protestants (and even
Catholics) that Paul preaches against salvation through the Mosaic Law
because no man can keep the whole law perfectly, not to mention man is
born guilty which means the law has already been broken. Contrary to
this thought, Paul actually teaches nobody can be saved by keeping the
Mosaic Law because the Mosaic Law was never designed to save and make
one a member of God's spiritual family (Gal 3:16ff). Only a soul which is
alive by sanctifying grace can be saved and receive adoption as
children of God (2 Cor 3:2ff).  The mention of boasting in this
context is also important. The boasting Paul is against is that which
was done most especially by some Jewish Christians (Judaizers) against
the Gentile Christians (though Gentiles had their problems too). The
Judaizers looked down upon their Gentile Christian brothers as an
inferior class of people (Rom 2:17-24) - due both to their ancestral lineage (not of
Abraham) and their ignorance of God's ways (the Gentiles lived in
immoral cultures) as revealed by the Law - despite the
fact the Gentiles were now brothers in Christ. This is a similar idea
to the treatment of Black Americans by many White Americans, even after
slavery became abolished and outlawed. This is why Paul drives home the
point in 2:14ff that Jesus was the fulfillment of the Old Covenant (Gal
3:15ff), and cornerstone of the New, in which both Jews and Gentiles
are now treated on equal ground and saved in the same manner (2:18ff).
With the main message of the pride of the Judaizers, Paul is at the
same time condemning boasting and prideful attitudes of any kind. 
The "good works" which 2:10 mentions are what the Christian is now called and able to perform. These works are the fruit and growth, but not the ground, of our salvation (the ground is grace). Protestants understand this verse to be saying good works will flow naturally out of any truly justified person, and, while not playing any role in justification, that these good works contribute towards the second phase of the Christian's life, what Protestants call "sanctification" (growing in holiness). While there is some truth to the Protestant claim there is also significant error. The main error is the formal separation of justification and sanctification (in that order) into two separate events, and that goes against the Catholic and, likewise, Biblical definitions of grace and justification laid out at the beginning of this paper. 
It should be very clear at this point that Protestants have no case when appealing to Eph 2:8f as a "justification by faith alone" proof text. The main reason is due to the proper understanding the phrase "by grace you have been saved" which, while fitting nicely in the Catholic understanding of justification, cannot be harmonized with the Protestant view of a justification that entails a favorable legal pronouncement for a guilty individual on the basis of an imputed extrinsic righteous status. My hope is that Catholics will recognize what the Catholic Church really teaches, and why it harmonizes with Scripture, so that they will be able to properly (and convincingly) explain the Catholic faith to others. 
August 5, 2008
 For more information, read CCC #1989 and following.
 Catholicism teaches all men are born lacking sanctifying grace in their souls as a consequence of Adam's disobedience (Original Sin). Sanctifying grace is a super-added gift to man's natural state, and it raises man from a naturally good state (created in the image of God) to a supernaturally good state (an adopted child of God).
 Protestantism, because of the rejection of the concept of sanctifying grace, understands Original Sin very differently from Catholicism. Protestantism sees the fall of Adam as something in which man fell from a naturally good state to a corrupted state. This corrupt state passes on to all men both in the form of a corrupted nature but also a guilty criminal record inherited from Adam as the "head of all humanity."
 For more information on the Protestant understanding of justification the following articles are suggested reading:
"Justification is a Forensic Act" by Charles Hodge (Reformed theologian)
"Justification Made Plain" by C.H. Spurgeon (Reformed preacher)
 It could be said that the "by grace you have been saved" reference in Ephesians 2:5 is in regards to the Protestant notion of regeneration (and thus not justification, as the Catholic position would assert). This is essentially what Reformed author Dr. James White asserts in his book* on justification, where he gives a verse by verse commentary of Ephesians 2:1-10. Commenting on verse 5, he says this verse describes the "act of regeneration," yet when commenting on verses 8-9, instead of mentioning regeneration he says, "just as justification is by faith, so the only avenue Paul presents is salvation by grace through faith." The problem here, which the book did not seem to recognize, is that the phrase "by grace you have been saved" cannot arbitrarily have two different meanings, especially in the span of 3 verses. It is important to recognize that verse 8 (a summary of the preceding verses) adds "through faith" in the description, "by grace you have been saved through faith," which means this reference to "saved" can only be talking about justification, and not regeneration. Thus when the phrase (by grace you have been saved) appears in verse 5, it likewise must be in reference to justification. The Catholic interpretation is further supported by examining the direct parallel in Colossians 2, addressed later in this article.
*White, James R. The God Who Justifies. Minneapolis: BethanyHouse, 2001. Pages 321, 325.
 This is not to say Paul is not concerned with Pelagianism (doing good works or getting saved apart God's actual and sanctifying grace). Paul is against any idea that obligates God to save, as if good works and salvation came from ourselves apart from grace. Paul is clear God grants salvation and grace as a gift, not payment of debt. The point is that Paul is not primarily concerned with Pelagianism, at least not in Eph 2, but with the inclusion of the Gentiles and Jews in the family of God.
 The Catholic Church explicitly denies any room for boasting of any kind by affirming the Canons of the Council of Orange which teach:
CANON 6. If anyone says that God has mercy upon us when, apart from his grace, we believe, will, desire, strive, labor, pray, watch, study, seek, ask, or knock, but does not confess that it is by the infusion and inspiration of the Holy Spirit within us that we have the faith, the will, or the strength to do all these things as we ought; or if anyone makes the assistance of grace depend on the humility or obedience of man and does not agree that it is a gift of grace itself that we are obedient and humble, he contradicts the Apostle who says, "What have you that you did not receive?" (1 Cor. 4:7), and, "But by the grace of God I am what I am" (1 Cor. 15:10).
 Another error with that Protestant claim is the notion that good works are guaranteed, yet nowhere does Scripture teach such a notion, in fact it indicates just the opposite. Ephesians 4:17-5:7 is a very clear warning for Christians to avoid sin and keep up with good works, but this is not the talk of someone who teaches good works are guaranteed (cf. 1 Cor 10:1-10; Col 1:22f; 2:18; Gal 6:7-9; etc) and, in fact, Paul is clear that salvation can be lost (cf. Eph 5:5; Col 3:5f; Gal 5:4; 5:19-21; etc).
Please see: An Examination of Eternal Security by Ben Douglass for a critical look at the Reformed Protestant doctrine of Eternal Security (Once Saved, Always Saved).
 For a more in depth look into the topic of justification see my article, "Justified by His Grace."