PRESS RELEASE
New Challenges for Central Banks in the EU Accession Process

Madam Chairwoman,

My fellow Colleagues,

Honorable Participants,

It is a pleasure for me to participate at this Conference and at the same time, I find it highly appropriate that one of its topics is the challenges that central banks in region are facing in the convergence process. As always, such an exchange of opinions among colleagues and peers is very fascinating.

My thoughts on the subject will be organized along three main pillars. To begin with, I will try to summarize where we stand in the convergence process. Next, I will highlight some of the lessons we have learned, till now. Lastly, I will try to tackle a few challenges that I think will be relevant for the future.

1. The SEE region and the EU convergence process

The political and economic future of the SEE region is strongly linked to the ongoing process of EU integration. The nearness of the region to the EU, a larger and more prosperous market, as well as the fundamental values of EU itself, make the convergence and integration process a 'must' long-term commitment. On the the other side, EU integration shapes our policy models and anchors our major political and economic reforms.

The convergence process in the SEE region can be divided into two periods.

Prior to the economic and financial crisis of 2008, convergence maintained a healthy upward trend and countries of the region were progressively catching up to the EU. After 2008, growth rates in the region moderated and the SEE region failed to maintain a steady pace of convergence. Currently, the average real income per capita in the region is about 35 percent of that of the EU average, which basically leads to the conclusion that it would take quite a long time to SEE, to fully converge to the EU average. At this point, it's clear something has to be done.

If we go back, the economic and financial crisis of 2008, while shaking the foundations of some of the largest developed world economies, played also a crucial role in exposing the vulnerabilities and the need for a systemic revise of the economic structures of the countries of the SEE. The fundamentals upon which growth in the region was based prior to the crisis proved to be unsustainable.

Fortunately, in setting our policy course for the future we can look back on some lessons we learned from our past.

2. A brief overview on the lessons learned so far

The convergence process has been difficult and challenging and I would like to highlight some of the lessons we have learned.

First, the journey to accession follows a long and hard path of institution building, economic restructuring, and policy discipline. This journey should structurally prepare our economies to withstand the competitive pressures within the EU market, as well as bring some degree of synchronization in order to avoid asymmetric shocks. Making progress in any of these areas is difficult in itself. However, a point often missed is that only a coordinated action plan, that covers all three areas, would prove to be successful.

Second, economic reforms often carry short-term costs. Stability-oriented policies usually give ground to short-sighted populist appeals, because building modern institutions means fighting the routine and sometimes tackling few interests. All of them create dissatisfactions and disagreements. However, as long as our societies remain committed to EU integration, this is a long path that we have to go through. But, as policy-makers we should not take their (EU) patience for granted. We should be determined on our actions, but honest and transparent on their results. Ultimately, we should be careful in explaining policy trade-offs and have realistic expectations regarding a credible accession time-frame.

This brings me to my third topic. The EU remains - at the moment - a moving target, in terms of internal political dynamics and ongoing structural reforms, which have been further strengthened in the aftermath of the crisis. As such, some of the political patterns of yesterday appear to be overturned, while new goals and commitments tend to gradually emerge. We need to be both aware of new trends and flexible in dealing with them.

Lastly, and a bit more technical, the dynamics of the crisis in the region and its subsequent effect should alert us on the need to have a more thorough view to economic stability. It's obvious that price or exchange rate stability targets should be supplemented by financial stability mandates. Furthermore, we should be conscious of any external or internal imbalance, and continuously stress-test the resilience of our economies against possible adverse scenarios.

To sum up my thoughts on these points, I would like to point out that while we - as policy-makers - have learned a lot from the past, the future remains quite difficult and uncertain.

With that being said, allow me to move to my next subject: what are the challenges we, as central banks, perceive as relevant for the future?

3. New challenges for central banks in the EU accession

Pursuant to the word and spirit of EU law, as monetary authorities, central banks are tasked with providing a major input in the process of convergence. Three out of five EU convergence criteria fall under the direct or indirect auhtority of central banks.

In terms of the nominal values defined by the Maastricht Criteria, Albania fulfills 3 out of the 5 criteria, namely:

• Price stability, with inflation lower than 1.5 percentage points above the average of best three EU performers;
• Exchange rate stability, with the domestic currency relatively stable, and even on an appreciating path in the past two years against the Euro.
• Low budget deficits, with a budget deficit below the 3% of GDP ceiling for two years in a row.

The two criteria we do not meet -yet - are the durability of the convergence, or the long-term government bonds interest rate, and the sustainability of public finances, or the relatively high level of public debt. Based on current trends, I'm convinced we should be able to achieve them under a reasonable time-frame.

I think our monetary policy framework, based on flexible exchange rate and an inflation targeting regime, is robust and mature enough to allow the Albanian economy to achieve the convergence' objectives within the next decade. From an institutional point of view, I believe Albania has chosen the right policy regime. In addition to our positive past experience, it also appears to be in line with EU guidelines. According to The European Commission, while there is no one size fits all policy mix, their preferred policy path to EU accession would be the one that combines a flexible exchange rate regime with an independent monetary policy, aimed at price stability. Furthermore, the recently introduced fiscal rule should enhance fiscal sustainability and should help decrease risk premia in financial markets.

However, limiting the role of central banks to the process of convergence is not to be recommended. As the regulator and supervisor of the banking system across the region, it has a major role in pursuing the structural reform agenda. Hence, I believe the central bank should be clearly engaged in at least three areas:

• Financial sector development. A sound and efficient financial market is a necessary prerequisite for a high and resilient long-term growth. Central banks in the region have been engaged in promoting credit growth, through accommodative policies and through reducing legal and institutional impediments to the improvement of NPLs. However, they can and should initiate growth, efficiency and resiliency enhancing structural reforms targeted at the financial markets:

- In terms of deepening financial markets, more needs to be done in order to develop capital markets. This is an unexploited resource which would ensure an alternative and efficient source for financing investments. As of now, SEE countries stand far behind the EU standards in this metric.

- In terms of increasing their resilience, we should: (i) try to align all domestic regulatory standards - financial ones - to those applied by central banks: (ii) further develop and improve safety nets, such as the bank resolution mechanism recently introduced at the Bank of Albania; and, (iii) try to apply sound management practices across all financial institutions. Completing all these tasks is not exclusively in the hands of the central banks, but they can become a catalyst for change.

• Accelerate convergence efforts. I believe the central banks should take full responsibility for advancing the convergence process in the following two areas:

- Regulatory convergence. Central banks in the region can be more ambitious in trying to harmonize their banking system regulation and their supervisory practices with those of the EU. While a full harmonization can be unrealistic, and even counterproductive, we should try to minimize our distance to EU standards.

- Institutional convergence. Central banks themselves need to adapt to EU requirements. To that extent, we should constantly try to increase our professionalism, improve our analytical and policy-making capacities, as well as enhance our policy implementation abilities. In short, we should always benchmark ourselves against EU standards,

• Enhance regional cooperation. The European Commission has set regional cooperation as a prerequisite step for the Western Balkans countries to gain membership in the union. The free trade agreement is already in place, helping somewhat our local economies prepare for the pressures of the single market. Businesses in the medium-term will benefit from competition from foreign peers, stimulating them to reform and increase their efficiency. However, the regional markets could use further integration. Access to a bigger market introduces higher risks, but creates greater opportunities, building a positive investment climate for local and global actors. The Berlin Process (Trieste Summit part of it), already underway, has demonstrated that the countries can work together for the creation of a better business climate. I am confident that this process will carry on, and progress in the region will be enjoyed from many sides, bringing accession to the single market closer for the region as a whole. As policy makers we should stimulate this process, through increasing our cooperation and coordination.

Thank You!