the european monetary system and the crea;on of the euro€¦ · george alogoskoufis,...
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheEuropeanMonetarySystemandtheCrea;onof
theEuroProf.GeorgeAlogoskoufis
FletcherSchool,TuAsUniversity
GeorgeAlogoskoufis,Interna'onalFinance,2016
TheCrea;onoftheEuropeanMonetarySystem(EMS)
• TheEuropeanMonetarySystem(EMS)wascreatedin1978inordertoensurerela;velystableexchangeratesintheEuropeanCommunity(EECnowEU).
• Thisstabilitywasaprerequisitefortheeffec;vefunc;oningoftheCommuni;es’othermechanisms,suchasthefreeintra-Communitytrade,theCommonAgriculturalPolicy(CAP),regionalandstructuralpolicyand,morerecently,theSingleMarketProgramme.
• Theini;a;vebelongedtotheFrench-GermanaxisandarrangementswereagreedintwoEuropeanCouncilsinBremeninJuly1978andinBrusselsinDecemberofthesameyear.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheStructureoftheEuropeanMonetarySystem
• EuropeanCurrencyUnit(ECU)
• ExchangeRateMechanism(ERM)
• FinancingFacili;es
• ExchangeRateRealignments
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheECUandBilateralExchangeRates
• ThefirstelementoftheEMSwastheEuropeanCurrencyUnit,theECU,definedasaweightedaverageoftheCommuni;es’sna;onalcurrencies.
• Foreachna;onalcurrencyacentralratewassetagainsttheECU.
• Foranytwocurrencies,thera;ooftheircentralratesagainsttheECUprovidedtheircentralbilateralexchangerate,andtotalofbilateralcentralratesdefinedtheparitygridofthesystem.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheExchangeRateMechanism
• ThesecondelementofthesystemwastheExchangeRateMechanism(ERM).
• Forcurrenciespar;cipa;ngintheERM,na;onalcentralbanksundertooktomaintainmarketratesagainstanyothercurrencyinthesystemwithinpredeterminedlimitsrela;vetothebilateralcentralrates.Theselimits,un;l1993,were±2.25%.Forsomecurrencies,widerlimitswereallowed,i.earangeof±6%.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
ExchangeMarketInterven;ons
• Exchangemarketinterven;onshadtotakeplacewhenabilateralratereachedthebandlimit,andinvolvedbothofthecentralbanksconcerned.Thesewerecalledmarginalinterven;ons.Withregardtomarginalinterven;ons,thecentralbankofthestrongestcurrencyundertooktoprovidethecentralbankoftheweakercurrencywithunlimitedcredit,aAerthela`erhadusedallofitsforeignexchangereservesinthatcurrency.
• Intra-marginalinterven;onsalsotookplace,bythecentralbankoftheweakercurrency.Thesewerenotcompulsory,andrequiredtheapprovalofthecentralbankwhosecurrencywasusedintheinterven;ons.
• Thewasalsoadivergenceindicator,whichdidnotplayanessen;alrole.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
FinancingFacili;es• ThethirdelementoftheEMSwerethefinancingfacili;es,whichweredividedintothreetypes:
• 1.TheVeryShortTermFinancingFacility,2.TheShortTermMonetarySupportand3.TheMediumTermFinancialAssistance.
• Themanagementofthefirsttwobelongedtothejurisdic;onofCentralBanks,whilethethirdwasunderthejurisdic;onoftheCouncilofMinisters.
• TheShortTermMonetarySupportprovidedshort-termcreditsforfinancingdeficitsinthebalanceofpayments,whiletheVeryShortTermFinancingFacilitywasaimedatfinancinginterven;onswithintheExchangeRateMechanism.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
ExchangeRateRealignments• ThefourthandfinalelementoftheEMSweretheperiodicrealignmentsofbilateralcentralpari;es.
• Ini;allythedecisiontoreadingthecentralpari;eswasunilateral,butlater,aAer1981,collec;vedecisionswererequiredwithintheCommunity’sMonetaryCommi`eeandtheECOFINCouncil.
• AAer1981,realignmentsdidnotcoverthefullinfla;ondifferen;albetweenthecurrencybeingdevaluedandtheothercurrencies.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
HowtheEMSWorked?• TheEMSreducedfluctua;onsinnominalandrealexchangeratesinEurope,thuscontribu;ngtoexchangeratestability.
• However,despiteitssymmetricaldesign,theEMSoperatedasymmetrically.
• AsymmetriescamefromthefactthatGermanmonetarypolicywassystema;callymorerestric;vethaninothereconomiespar;cipa;nginthesystem,andbythefactthattheDMwasaninterna;onalcurrencytoamuchgreaterextentthantheothercurrenciesoftheEuropeanUnion.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
ABroadDMZone• Themorerestric;vemonetarypolicyoftheGermanBundesbankledtotheneedforintra-marginalinterven;onsbyothercentralbanks.Thus,monetarypolicybecamemorerestric;veinallthecountriesthatpar;cipatedinthesystem.Otherwise,thepressureonweakercurrencieswasstrongandresultedintheneedforrealignment(devalua;on)oftheirexchangerates.
• Becauseofcollec;vedecisionsforrealignments,devalua;onsincountrieswithloosemonetarypolicyandhighinfla;on,wasneverequaltothecumula;veinfla;ondifferen;albetweentheeconomywiththeweakcurrencyandGermany.Thus,Germanywasbecomingmoreandmorecompe;;ve.Between1986and1992,realignmentsvirtuallyceased.
• TheEMSbecameinabroadDMzone,wheremonetarypolicywasdeterminedessen;allybythepolicyofBundesbank.Therestofthesystem"borrowed"thean;-infla;onaryreputa;onoftheBundesbank,andthustherestofthecountriesendedupwithlowinfla;on.
• Atthesame;me,Germanywasgainingincompe;;veness,asithadlowerinfla;onthantherestandanyrealignmentsdidnotfullycoverthisinfla;ondifferen;al.Consequently,allcamewithsomethingoutofthesystem,withGermanyprobablywithmoreasitwasgainingincompe;;venessandwasthefocusofthesystem.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
ThePathTowardstheEuro• Theini;a;veforthecrea;onofthesinglecurrencybelongedtoFrance,whichearlyin1988,withamemorandumoftheMinisterofFinancetohisEECcolleaguesproposedthemarchtowardsthesinglecurrency.ItalyagreedimmediatelyandGermanyhadnoop;onbuttoagreeaswell.
• TheEuropeanCouncilinHanoverinJune1988setupaneight-membercommi`ee,chairedbyJacquesDelors,thenPresidentoftheEuropeanCommission,whichwouldstudythema`er.TheCommi`ee,inApril1989,submi`edareporttotheCouncilofFinanceMinisters(ECOFIN)proposingathreestageprocessforcrea;ngasinglecurrency.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheThreeStagesTowardsMonetaryUnion
• Thefirststageenvisagedcapitalaccountliberaliza;onforthecountriespar;cipa;ngintheEMS,un;lJuly1990.Nocountrywouldbeallowedtomaintaincapitalcontrols.
• Thesecondstage,whichbeganonJanuary1,1994,aimedatthegreatestpossibleconvergenceoffiscalandmonetarypoliciesofEUmemberstates,asenvisagedintheMaastrichtTreatyof1992,inordertoachievefiscalconvergenceandpricestability,whichweredeemednecessaryandsufficientcondi;onsformonetaryintegra;on.
• Thethirdstagewasthemonetaryunionitself,whichwouldtransferallmonetarypolicydecisionstoanindependentEuropeanCentralBank.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheMaastrichtTreatyandtheEuro
• Inlate1991,aAeranintergovernmentalconference(IGC),allEECmemberstatessignedinMaastrichtinHollandtheTreatyonEuropeanUnion.
• Underthistreaty,theEECwasrenamedEuropeanUnion,andinaddi;ontotheSingleMarketprogram,EECmembersagreedonadetailed;metableandcondi;onsforadop;ngthesinglecurrency.
• Thedeadlinesfortheintroduc;onofthenewcurrencywereadoptedbytheMadridEuropeanCouncilinDecember1995.ThisCouncilalsodecidedthatthe"euro"wouldbethenameforthesinglecurrency.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheTimetablefortheAdop;onoftheEuro
• The;metables;pulatedthatun;lJanuary1,1994theEUwouldcompletethesinglemarketandallna;onalparliamentswillhavera;fiedtheMaastrichtTreaty.
• Italsoprovidedfortheprohibi;onofmonetaryfinancingofbudgetdeficits,theliAingofallrestric;onsonthemovementofcapitalandprepara;onforpar;cipa;onintheExchangeRateMechanismoftheEuropeanMonetarySystemforthecountriesthatwerenotpartofit,aswellasthepoli;calindependenceofcentralbanks.
• Whenthesecondi;onsweresa;sfied,thesecondstageofEconomicandMonetaryUnion(EMU)wouldbegin.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheConvergenceCriteria• TheMaastrichtTreatyontheEuropeanUnionalsoprovidedfortheadop;onoftargetsfor1.reducingbudgetdeficitsbelow3%ofGDP,2.reducingpublicdebtbelow60%ofGDPand3.reducinginfla;onandnominalinterestratesclosetotheaverageofthethreecountrieswiththelowestinfla;onrates.
• Achievingtheseobjec;veswasconsideredasaprerequisiteforacountrytopar;cipateinthethirdstageofEMU.
• TheEuropeanCommissionandtheEuropeanCentralBankwouldjudge,insocalledConvergenceReports,whetheracountrydidordidnotsa;sfythesecriteria.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
PressuresontheExchangeRateMechanism
• Thesecondasymmetryofthesystemresultedfromtheinterna;onalposi;onoftheGermanmark,whichwasaninterna;onalreservecurrency,unlikeothercurrenciesintheEMS.ThismeantthattherewerepressuresintheERM,whenthereweredisturbancesininterna;onalfinancialmarketsaffec;ngtheexchangerateofthedollarortheyen.
• ThesedisturbancescausedgreaterchangesindemandandsupplyforDMsinrela;ontootherEuropeancurrencies,resul;nginsignificantpressureonthebilateralexchangeratesofeuropeancurrenciesagainsttheDM.
• TheERMfacedconsiderablepressuresinsuchperiods,suchas1981-1983,orin1986.Thesepressuresleadtorealignmentsofcentralpari;es.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
The1992-93Crisis• Thecompleteaboli;onofcapitalcontrolssincetheearly1990smadetheERMextremelyvulnerable,asdemonstratedbythespecula;vea`acksofSeptember1992andAugust1993.
• Aseriesofadverseshocksbrokedownthedefensemechanismsofthesystem,suchasthemechanismforcoordina;ngmacroeconomicpoliciesandtherealignmentofexchangerates.
• InSeptember1992,thecredibilityoftheERMwastested,andthesystemcouldnotstandthepressures.BoththeItalianliraandtheBri;shpoundceasedtopar;cipateintheERM.
• AAerayearofrealignmentsandperiodiccrisesun;llateJuly1993,andfollowingfurtherpressureontheexchangeratesofweakercurrencies,theECOFINdecidedtoextendthefluctua;onmarginsto±15%,inordertodefusepressures.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
FactorsthatContributedtothe1992-93Crisis
• Firstly,Germanunifica'on,whichtransformedGermanyfromanetcreditortonetborrowerintheglobaleconomy.
• Second,USmonetarypolicy.In1992,duetotheelec;onsandtherecessionintheUS,monetarypolicywasmorerelaxed,andthedollarenteredintoadeprecia;onpathagainsttheDM,thatincreasedpressuresontheERM.
• Thirdly,thepoli'calcrisisinItaly.Thistookplaceata;mewhentherewasalargeincreaseinthefiscaldeficitandpublicdebt,whichcausedacrisisofconfidenceandspecula;vepressuresontheItalianlira.
• Fourth,thenega'veresultofthereferenduminDenmarkonthera;fica;onoftheMaastrichtTreaty,theprospectoftheFrenchreferendumandtheambiguousaDtudeofpoli'ciansinGreatBritain,causedgeneralcrisisofconfidenceinthesystemandintheprocessofEconomicandMonetaryUnion.
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FF/DMExchangeRate
19
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
4.0001957.01
1957.11
1958.09
1959.07
1960.05
1961.03
1962.01
1962.11
1963.09
1964.07
1965.05
1966.03
1967.01
1967.11
1968.09
1969.07
1970.05
1971.03
1972.01
1972.11
1973.09
1974.07
1975.05
1976.03
1977.01
1977.11
1978.09
1979.07
1980.05
1981.03
1982.01
1982.11
1983.09
1984.07
1985.05
1986.03
1987.01
1987.11
1988.09
1989.07
1990.05
1991.03
1992.01
1992.11
1993.09
1994.07
1995.05
1996.03
1997.01
1997.11
1998.09
FFDMExchangeRate
GeorgeAlogoskoufis,Interna'onalFinance,2016
ITL/DMExchangeRate
20
0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
1400.001957.01
1957.11
1958.09
1959.07
1960.05
1961.03
1962.01
1962.11
1963.09
1964.07
1965.05
1966.03
1967.01
1967.11
1968.09
1969.07
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1971.03
1972.01
1972.11
1973.09
1974.07
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1976.03
1977.01
1977.11
1978.09
1979.07
1980.05
1981.03
1982.01
1982.11
1983.09
1984.07
1985.05
1986.03
1987.01
1987.11
1988.09
1989.07
1990.05
1991.03
1992.01
1992.11
1993.09
1994.07
1995.05
1996.03
1997.01
1997.11
1998.09
ITLDMExchangeRate
GeorgeAlogoskoufis,Interna'onalFinance,2016
£/DMExchangeRate
21
0.000
0.050
0.100
0.150
0.200
0.250
0.300
0.350
0.400
0.450
0.5001957.01
1957.11
1958.09
1959.07
1960.05
1961.03
1962.01
1962.11
1963.09
1964.07
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1967.01
1967.11
1968.09
1969.07
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1971.03
1972.01
1972.11
1973.09
1974.07
1975.05
1976.03
1977.01
1977.11
1978.09
1979.07
1980.05
1981.03
1982.01
1982.11
1983.09
1984.07
1985.05
1986.03
1987.01
1987.11
1988.09
1989.07
1990.05
1991.03
1992.01
1992.11
1993.09
1994.07
1995.05
1996.03
1997.01
1997.11
1998.09
£DMExchangeRate
GeorgeAlogoskoufis,Interna'onalFinance,2016
$/DMExchangeRate
22
0.000
0.100
0.200
0.300
0.400
0.500
0.600
0.700
0.8001957.01
1957.11
1958.09
1959.07
1960.05
1961.03
1962.01
1962.11
1963.09
1964.07
1965.05
1966.03
1967.01
1967.11
1968.09
1969.07
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1971.03
1972.01
1972.11
1973.09
1974.07
1975.05
1976.03
1977.01
1977.11
1978.09
1979.07
1980.05
1981.03
1982.01
1982.11
1983.09
1984.07
1985.05
1986.03
1987.01
1987.11
1988.09
1989.07
1990.05
1991.03
1992.01
1992.11
1993.09
1994.07
1995.05
1996.03
1997.01
1997.11
1998.09
$DMExchangeRate
GeorgeAlogoskoufis,Interna'onalFinance,2016
Infla;oninFranceandGermany
23
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%1956.01
1957.04
1958.07
1959.10
1961.01
1962.04
1963.07
1964.10
1966.01
1967.04
1968.07
1969.10
1971.01
1972.04
1973.07
1974.10
1976.01
1977.04
1978.07
1979.10
1981.01
1982.04
1983.07
1984.10
1986.01
1987.04
1988.07
1989.10
1991.01
1992.04
1993.07
1994.10
1996.01
1997.04
1998.07
1999.10
2001.01
2002.04
2003.07
2004.10
2006.01
2007.04
2008.07
2009.10
2011.01
2012.04
2013.07
2014.10
2016.01
France Germany
GeorgeAlogoskoufis,Interna'onalFinance,2016
Infla;oninItalyandGermany
24
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%1956.01
1957.04
1958.07
1959.10
1961.01
1962.04
1963.07
1964.10
1966.01
1967.04
1968.07
1969.10
1971.01
1972.04
1973.07
1974.10
1976.01
1977.04
1978.07
1979.10
1981.01
1982.04
1983.07
1984.10
1986.01
1987.04
1988.07
1989.10
1991.01
1992.04
1993.07
1994.10
1996.01
1997.04
1998.07
1999.10
2001.01
2002.04
2003.07
2004.10
2006.01
2007.04
2008.07
2009.10
2011.01
2012.04
2013.07
2014.10
2016.01
Italy Germany
GeorgeAlogoskoufis,Interna'onalFinance,2016
Infla;onintheUKandGermany
25
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%1956.01
1957.04
1958.07
1959.10
1961.01
1962.04
1963.07
1964.10
1966.01
1967.04
1968.07
1969.10
1971.01
1972.04
1973.07
1974.10
1976.01
1977.04
1978.07
1979.10
1981.01
1982.04
1983.07
1984.10
1986.01
1987.04
1988.07
1989.10
1991.01
1992.04
1993.07
1994.10
1996.01
1997.04
1998.07
1999.10
2001.01
2002.04
2003.07
2004.10
2006.01
2007.04
2008.07
2009.10
2011.01
2012.04
2013.07
2014.10
2016.01
UK Germany
GeorgeAlogoskoufis,Interna'onalFinance,2016
Infla;onintheUSAandGermany
26
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%1956.01
1957.04
1958.07
1959.10
1961.01
1962.04
1963.07
1964.10
1966.01
1967.04
1968.07
1969.10
1971.01
1972.04
1973.07
1974.10
1976.01
1977.04
1978.07
1979.10
1981.01
1982.04
1983.07
1984.10
1986.01
1987.04
1988.07
1989.10
1991.01
1992.04
1993.07
1994.10
1996.01
1997.04
1998.07
1999.10
2001.01
2002.04
2003.07
2004.10
2006.01
2007.04
2008.07
2009.10
2011.01
2012.04
2013.07
2014.10
2016.01
USA Germany
GeorgeAlogoskoufis,Interna'onalFinance,2016
TheFinalStageofEMU• ThethirdstagebeganonJanuary1,1999byirrevocablyfixingthebilateralexchangeratesofthecurrenciesofthepar;cipa;ngcountriesandthesinglecurrency.,theEuro.
• InMay1998itwasdecidedwhichcountrieswillpar;cipateinthethirdstageofEMU.Theselec;onofthe11countrieswasbasedonthefivefiscalandmonetaryconvergencecriteriaoftheMaastrichtTreaty.
• ThethirdphasewascompletedonJanuary1,2001withtheintroduc;onoftheeuroinaccoun;ngform.
• FromJanuary1,2002theeurobecamelegaltender,withtheintroduc;onofcashineverydaytransac;ons.Onthisday,thecircula;onofbanknotesandcoinsandthegradual(withintwomonths)withdrawalofna;onalcurrenciesbeganthroughouttheEuroArea.
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TheEuropeanCentralBankandtheStabilityandGrowthPact
• FromJanuary1,2001intheEuroAreaeconomythereisasinglemonetarypolicyforallcountries,decideduponandimplementedbytheEuropeanCentralBank,whichaimstoensurepricestability.
• Acentralpillarofmacroeconomicpolicycoordina;onistheStabilityandGrowthPact(SGP).ThepactrequiresalleconomiesintheEurozoneandtheEUtomaintainfiscaldeficitsbelow3%ofGDP,pursuingbudgetarybalanceoverthemediumtermandtoensurethatpublicdebtdoesnotexceed60%ofGDP,orthatittendstowardsthisobjec;ve.
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GeorgeAlogoskoufis,Interna'onalFinance,2016
TheImplementa;onoftheStabilityandGrowthPact
• TheStabilityandGrowthPact(SGP)providesforremedialac;onforthoseeconomiesthatdonotmeettheirfiscaltargets.ThePactwasrevisedin2005,aAerseveraleconomies,includingGermanyandFrance,failedtocorrecttheirexcessivedeficits.
• TherevisedPactwasmoreflexibleregardingthe;meavailableforthecorrec;onofexcessivedeficits,butatthesame;memoredemandingintermsofachievingfiscalbalance.
• Countrieswererequiredtotendtowardsfiscalbalance(zerobudgetdeficits)duringsocalled"good;mes”,byreducingtheirdeficitsbyatleast0.5%ofGDPannually.
• AAerthecrisisof2008,theEuropeanCommissionproposedandtheECOFINCouncildecidedtoapplythepactinamoreflexibleway.
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GovernmentDeficitsintheEuroArea
30
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
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2013
2014
2015
2016
2017
DeficitofGeneralGovernment(%ofGDP)
GeorgeAlogoskoufis,Interna'onalFinance,2016
GovernmentDebtintheEuroArea
31
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
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DebtofGeneralGovernment(%ofGDP)