ABOUT


BACKGROUND

The Center of Excellence in Finance (CEF) has proposed a joint half-day seminar with the IMF and the European Commission to discuss with senior officials in Southeast Europe ways to build policy design and implementation capacities in the region. It is now agreed that the seminar will be held during the Spring 2009 IMF and World Bank Meetings.

As economies in Southeast Europe pursue sustainable growth within the framework of EU Accession and Convergence frameworks, they face important challenges in building implementation capacity. The current crisis in global financial markets, which has begun to impact many emerging markets including those in Southeast Europe, underscores the key role that strongly anchored medium-term economic and fiscal programs need to play in establishing credibility and stabilizing confidence.

For these economies, a natural anchor for such economic programs is the EU Accession and Convergence framework. However, questions had been raised-even before the current crisis-as to whether countries had developed the internal strategy and coordination processes to fully benefit from the EU anchor as they prepared integrated medium-term economic programs. In particular, there was a concern that the design and implementation of fiscal policy needs to be better coordinated with the broad goals of economic convergence in order to support both growth and financial stability.

Today's global market conditions are an exceptional test for policies and in this context, some former transition economies have sought renewed arrangements with the IMF to stabilize their financial sectors and limit the impact of the current financial crises on domestic economies. They are also seeking assistance with efforts to adjust fiscal frameworks to ensure medium-term fiscal sustainability during this extremely volatile period. It is possible that the number of former transition countries requiring assistance from the IMF and other multi-lateral institutions will grow over the course of 2009. Ultimately, the goal should be to ensure that an improved policy framework is established over the medium-term that will strengthen countries' ability to recover from the financial and economic shocks to which they are being subjected in the current environment.

RISING TO THE CHALLENGE

An effective agenda to enhance medium-term economic strategy and coordination involves assessing how the IMF, the European Commission, and the CEF could cooperate over the next three to five years in order to build up domestic policy institutions in Southeast Europe, with a special emphasis on the role of fiscal policy and on the EU Accession and Convergence process as an anchor. In particular, the question is how to strengthen these countries' capacity to formulate and implement integrated medium-term economic programs and thus ensure that structural reforms are placed in a consistent and well-designed macroeconomic framework. Some Southeast European countries are already EU member states but even in these cases policy processes have not always reached the stage, for example, of delivering a fiscal policy that is both prudent and supportive of growth. While political commitment is crucial, sound frameworks can guide and support prudent policies.

This involves identifying specific capacity building needs, placing these in a consistent context with technical assistance and training priorities in the region, linking this process to a progressive strengthening of the countries input to policy dialogues, and identifying how the EU frameworks can serve most effectively as an anchor for this process over the years ahead. This would entail an approach based on partnership of the IMF and European Commission to help address these challenges in the Southeast European countries.

Identifying concrete ways forward in this area is the object of the planned seminar, which would be attended at the level of ministers and governors or their deputies. It would explore the scope for strengthened collaboration in this area among the IMF, European Commission, and the CEF. Four issues are of particular interest in this connection:

  • Diagnosing the medium-term policy context, with emphasis on EU convergence;
  • Identifying capacity building needs in developing well-coordinated economic and fiscal programs;
  • Designing and delivering training workshops focused on medium-term program design;
  • Integrating this with a continuing and expanded role of technical assistance in related areas.

One focus for this process is the submission of medium-term policy programs to the European Commission. Candidate countries submit annual Pre-Accession Economic Programs (PEPs) to the Commission, and a parallel procedure of annual Economic and Fiscal Programs (EFPs) has been introduced for potential candidate countries. These programs represent an opportunity for country authorities to review medium-term economic strategy options and develop coordinated policies within the accession framework and along lines that will safeguard economic and financial stability. In the Commission's surveillance process, a special emphasis is laid on the role of fiscal policy in fostering both growth and financial stability.

Four main subjects might be on the table when discussing how to help countries address the challenges of developing robust macroeconomic policies for EU accession:

  • Diagnosis of policy challenges: Recent experience signals that these can be diverse. While wide-scale euroization continues to limit the scope for full fledged autonomous monetary policies, countries have to a variable degree anchored they currency to the euro. Fiscal space has been gained in a number of countries through debt reduction in recent years, but may not allow for fiscal counter-cyclical measures, as elsewhere in the world, without exacerbating external imbalances. Second-round effects of the crisis may particularly affect those countries that have the highest current account deficits. Well-adapted support, including in capacity building, must be informed by priorities in each economic context.
  • Identification of specific needs: This must take into account the diversity in institutional features and reform progress; the strengths and weaknesses in recent programs submitted to the European Commission; and the fit of such programs with broad surveillance priorities-bearing in mind possible shifts, over time, in the availability and cost of capital market financing; the role of country specific institutional and political environment must also be taken into account.
  • Capacity building: There is a strong synergy to be realized between capacity building via training workshops and support for implementation through technical assistance programs (with an emphasis on the fiscal area): mechanisms need to be established that would fine-tune delivery over time, and also identify newly emerging needs.
  • Delivery and financing modalities: The CEF envisages this as a partnership initiative, which would draw human and financial resources from existing stakeholders (IMF, EC, CEF, and others) in the region. The specifics of such support would need to be clear for a broad program to be launched that could credibly extend over several annual training and TA cycles.