Governor Fullani's speech at the ministerial level seminar ''Economic Stability and EU Convergence in Southeast Europe: Building Capacities for Policy Design and Implementation'', Washington D.C., April 24, 2009

Publication date: 24.04.2009


I am honored and happy to be here today to share with you my thoughts on this important issue. The role of external anchors has been at the center of our discussion during the last three years. The Central Bank of Albania has discussed this issue in context of potential future fiscal implications for monetary policy and the economy as a whole. I will take advantage of today's occasion, to explain and extend upon the ideas that I have put forward in the last couple of years.

Albania is one of the success stories of the transition supported by the IMF economic programs. These programs have been important anchors for sound macroeconomic and financial policies for most of the transition period. Structural reforms undertaken since the beginning of transition have induced considerable progress in the country's political, economic, and social aspects leading to a substantial enhancement of Albania's international image. Consequently, the Strasburg Summit declared Albania a full rights member of NATO, and shortly thereafter, Albania submitted its official application for becoming a candidate for EU membership to the EU presidency, the Czech Republic.

The last IMF program ended in January 2009, at the same moment when the economic slowdown that followed the financial crises in the developed countries started to extend its effect on the emerging economies, including the Albanian economy. The same developments imposed substantial economic problems in some Central European Economies. These latest troubles in the former transition countries, especially 'successful' economies of Central Europe, invite us to reflect upon the role of the institutions and the policies that have served as foreign anchors in this process.

After the fall of communism the IMF was invited to design and implement an economic program that would transform the former centrally planed economies in efficient market oriented ones. Despite ups and downs in economic results during the early stages of transition, along with few episodes of crises, the end of the period showed that IMF surveillance programs were successful in stabilizing transition economies and restoring the general macroeconomic equilibrium. However, current events show that despite 20 years of reforms these economies remain fragile and vulnerable to risks.

By the beginning of 2000 most of these countries were concerned with the EU accession process, and the Maastricht criteria became an important external anchor for these economies. The process resulted in further consolidation of the general macroeconomic conditions.

The new era of becoming EU members was coupled with rapid credit growth, widening fiscal and current account deficits. The fiscal consolidation reversed, and all economies showed signs of overheating. Strong capital inflows were financing all these activities and resulted in a persistent increase of the current account deficits.  Instead of cooling down the economy, all these worrisome developments were justified with a fast catching up process. Private Banks lost sight of growing imbalances, and found security in the past developments of exchange rate and credit risks. It was widely assumed that past stability in goods, financial, and foreign exchange markets was going to continue thus, assuming that foreign exchange and credit risks had disappeared. The long run stability that motivated all reforms up to accession was replaced with the short-run motivation of the politicians. Recently, many new member countries are going back to IMF support. Are they looking for financial support or for external anchors? Is this an attempt to solve long-term problems by short-term measures?

Let me move to the South East European region to which my country belongs.

I sincerely think that the transformation process that has changed our societies since the fall of the Berlin wall is irreversible. The real question is how long will the convergence process last.

The region should carefully analyze the past and current problems of the transition process, and answer to the following questions. Is there any lesson the region should learn from the latest developments? Do these economies need further surveillance? If yes, who should be the international factor to perform that role, particularly considering the European integration aspiration?

Considering the experience of the other emerging European economies, I am convinced that our countries need and will need to be under international surveillance. I believe that external anchors are important for a natural integration with Europe. By integration I mean the moment when our countries will adopt Euro as legal tender in a natural way, as was the case with Slovenia and Slovakia.

If I were asked to put in simple words how I understand the convergence process, my answer would be very straightforward: Convergence means a set of performance criteria and structural reform benchmarks to be met continuously as the country moves in its long term path of full integration with EU standards.

This means that each country should adopt the standards stemming from the Acquis Communautaire and other international codes combined with energetic steps in improving economy, society, culture and environment as well. I think this is a MUST for promoting political, financial and social progress in the entire Region.

Based on the experience of the last two decades of reforms designed and implemented in the context of IMF economic agreements, I personally believe that a credible, functional anchor must satisfy the following criteria:

1. Provide motivation to follow sound economic policies in the long run.
2. Have a final goal that is consistent with the mission of the anchor setting institution.
3. Provide a simple, transparent and credible quantitative system for measuring progress.
4. The anchor setting institution can identify in a reliable way potential threats and ways to minimize their occurrence.
5. Anchors should not be given up, traded or exchanged, even in the case of clear visible short term benefits, including political ones. 
6. The anchor setting institution should have as local counterparties both the central bank and the government.
7. The respective anchor must lead to preannounced results.
8. The anchor setting institution must be able to supply assistance on demand regarding the fulfillment of the anchor policies.
9. The policies and conditions designed under the anchor must fit the characteristics of the economy in question.
10.  The anchor must guarantee objective and policy harmonization between monetary and fiscal policy.

Hence, from the above it is clear that the role of the anchor is not only good policy design. The role of the anchor is strong and enforced commitment to good and sound fiscal policies.

For this reason, evaluating the growing ambitions of SEE countries for EU membership, I personally believe that the role of the EC as an external anchor should be given greater importance. To be more specific, I will elaborate on two structurally essential issues, in my viewpoint:

- Firstly, the EC should clearly identify as local counterparties two equally important actors: the Government and the Central Bank. Despite the EC being a political institution, it must recognize the Central Bank as a rightful partner, with comprehensive negotiation privileges. If this powerful anchor incorporates the central bank as well, then policy and objective coordination will improve significantly.

- Secondly, it is imperative that each category of issues under negotiation receive due attention and be assigned due importance in comparison with the other categories. In general, governments prefer to negotiate and to commit on many other issues rather than the economic performance criteria. For that reason, the EU should ensure that the fulfillment of the economic performance criteria shall not be traded for something that can be dearer to EU policy and its short term objectives.

Given these two structural reasons and some other concerns of a more practical nature, it would be reasonable for the EU to play the role of external anchor in cooperation with the IMF as far as the economy and finances are concerned.

The Maastricht criteria constitute the finish line, the strategic objective for countries in the region. They compose a wonderful set of indicators that signal and promote long term economic and financial soundness for developed economies of Europe. However, the starting point of the development path that the SEE countries need to follow is different from the one of the developed Europe. The journey is long, difficult, and challenging and therefore, requires specialized surveillance.  

In spite of its efforts to serve as a reliable external anchor, the EC alone will be hard-pressed in the performance of such task especially in the area of specific macroeconomic policy design in transition or emerging economies. More specifically, this includes policy harmonization, the relevant technical assistance, as well as the surveillance of the economic progress. Therefore, it might be logical for the EU to invite the IMF to work together in all those areas where the IMF has demonstrated comparative advantages.

The recent enhancement of the IMF role as a lender and a guardian of global imbalances will increase the effectives of the surveillance, and will provide a better allocation of the international funds. The current events in the former transition countries show that the need for the IMF style surveillance remains relevant until the domestic anchors are fully developed. This remains true even for the countries that successfully end the accession process as new EU members.

For all the reasons described above it is important that EU in cooperation with IMF and other interested stakeholders must design and implement a special joint package. This should include policy orientation, guidelines for better governance, the set of quantitative conditions, the bulk of structural reforms, and finally relevant technical assistance.

This economic package must be designed around the values of regional cooperation and integration, with flexible policies that aim at increasing confidence in the region. It must foster better EU AND IMF surveillance. This will ensure that short run political motivations in bilateral relationships between the EU and individual countries will not shadow the long run goals.

In conclusion, the EU must analyze and evaluate its abilities to serve as an external anchor in the context of the next round of accession. To design and implement this new role in the region, the EU must define and state clearly the political goals for the region. I also invite the ECB and EC to explore the possibility of adopting a standard treatment for the entire SEE region, by adopting a specific program for a specific group of countries.

Finally, we must understand that external anchors will not support long run sustainable prosperity in the absence of the domestic anchors.

I consider internal anchors to be vital, because our economies will ultimately need to walk on their own feet. That said, the extent to which our progress will be safe, effective, and forward-looking will depend on the compliance of this process with the legal, moral, and cultural norms and rules that society builds and develops over time. Deviation from such norms, customs, or behavioral codes would result in huge political costs, conferring on this set of norms and rules the role of a natural internal anchor for performance evaluation.

I personally believe that one of the most effective domestic anchors is the central bank independence. Without discussing the theoretical and practical benefits of this essential element for the central bank, I want to emphasize that a truly independent central bank that enjoys high credibility among the public is a domestic anchor that minimizes the risk of inconsistent policies in which short-term interests dominate over the long-term ones.

Moreover, my assessment of economic situation in the SEE countries indicates that there is room for greater fiscal discipline. Governments should establish a clear measurable fiscal rule, immune from political rotation. This will provide another effective domestic anchor, the so called society mechanism to control short-run political behavior.

That is why I consider the pressure of external anchors to be of special importance for the establishment of solid domestic anchors in our societies. Such pressure must persist until society has achieved a higher level of emancipation and wellbeing, and can naturally factor the observance of domestic anchors into its political behavior.

Thus, the long-run credibility of external anchors is grounded in strong and effective domestic anchors; the two complement and reinforce each other.