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A Comparison of the ERM Crisis in the Early 1990s with Recent Years' Financial and Sovereign Debt Crisis in Europe - Part 1

The launch of the euro largely eliminated yield spreads between the euro area member states. This gave the countries facing macroeconomic imbalances more time to address the problems before the imbalances were reflected in long-term interest rates and without an increase in short-term interest rates, which were now determined by monetary policy for the euro area overall. However, the improved framework for correcting imbalances was not used, and the euro area systems for overseeing and preventing macroeconomic imbalances turned out to be inadequate. This was part of the reason why the imbalances were allowed to accumulate to a much higher level than had been the case before the crisis in the early 1990s.