Over the course of 2009, the Center of Excellence in Finance (CEF) together with other partner organizations –Bank of Albania, the European Central Bank (ECB), the European Commission (EC), and the International Monetary Fund (IMF) – hosted a seminar for senior policy makers and a further workshop for officials of Southeast European (SEE) countries and Turkey to examine ways to build policy design and implementation capacities in the region. The two meetings were extremely well attended and highlighted awareness by country authorities of the significant challenges that lie before countries in the region as they emerge from the effects of the prolonged global downturn.

The meetings focused on general themes predicated on the need to develop policy design capacity. This proved a very useful springboard in identifying the key issues that have become the focus of policy makers’ attention as the crisis impacted on countries in the region and – importantly – the realization of the need to develop exit strategies to minimize the long lasting impact of the crisis while restoring government finances to a sustainable path.

Fiscal policy responses to the crises were constrained by factors, such as, availability of financing and fiscal space to use fiscal measures to counteract the impact of the crisis. However, irrespective of individual countries’ underlying fiscal positions, most of the policy responses were generally ad-hoc and were largely not rooted in sustainable medium-term strategies. There were many reasons for this and some of the key deficiencies identified included weak governance and levels of transparency and the absence of credible medium-term frameworks to assist in maintaining sustainable fiscal policies.

The importance of the role of external and domestic fiscal policy anchors in ensuring fiscal sustainability was a recurrent topic in both meetings. All participants were agreed that a strengthening of external anchors is still needed over the medium term, and that while the EC fiscal surveillance procedures offer a “natural” anchor in the longer run for countries in the region, a deepening of fiscal dialogue and diagnosis is needed with the aid of inputs from the IMF and other international financial institutions (IFI’s) to help better anchor countries’ policy decisions.

Of considerable interest was the amount of discussion on the need to strengthen individual countries’ domestic policy anchors and a number of ideas were considered to ensure the credibility of policy anchors including increasingly popular measures, such as, implementation of fiscal rules and possibly the creation of independent fiscal agencies. Whether these solutions are right for every country is a key issue that requires further debate.

The need for policy responses to be tailored to meet the individual needs of countries in the region was a strong message that came out of Tirana workshop. While there are obvious similarities in many countries in the region that can be addressed at a cross-country level, the political, institutional, and social realities need to be taken into account when designing mechanisms to ensure fiscal sustainability over the longer-term.

In relation to monetary policy, the role of national monetary policies differs greatly in countries largely dependent on countries’ monetary and exchange rate regimes. Countries with fixed exchange rate regimes such as Eurosystem members, currency boards or currency pegs have limited room for maneuver. Therefore the main thrust of policy responses to the current crisis has to be borne through implementation of sound fiscal, prudential, and structural policies. Indeed, this situation characterizes – to differing degrees – most of the countries in the region.

¹ A seminar aimed at ministerial level entitled “Economic Stability and EU Convergence in Southeast Europe: Building Capacities for Policy Design and Implementation” was held in Washington on April 24, 2009 and a EC TAIEX supported workshop aimed at senior officials entitled “Building Capacities for Policy Design and Implementation” was held in Tirana, Albania between December 3–4, 2009.