The overall economic structure was not competitive while growth declined as external demand collapsed and domestic demand suffered from higher uncertainties, higher risk premium and lack of funding. On the financial side, our economies suffered as foreign banks deleveraged and reduced their exposure to SEE. On top of this, several countries faced high vulnerabilities in the financial system, as the NPL’s grew rapidly on a combination of weak growth and FX currency loans to un-hedged borrowers. This picture is of course a generalization. Different countries have had different experiences, depending from their initial conditions and policy responses. However, the crisis exposed several weaknesses of this economic model. At the same time, to the extent that there are differences among countries, we can draw more conclusions from our experience: •  Countries with favorable initial conditions suffered the least. Albania has been one such case. We have not entirely avoided the build-up in imbalances, but we have been careful enough to avoid currency mismatches in bank lending, to foster a prudent business model for the banking system, to avoid short-term currency inflows and to focus on overall stability as a precondition for long term growth. •  Countries with stability and long-term oriented policies have performed better. The policy dilemma in SEE has largely been whether to support economic growth through countercyclical policies or to prioritize economic and financial stability through tough corrective action. Providing macroeconomic stimulus if your economy is import-oriented may prove to be a futile exercise.

This can be done with the understanding that both policies, if designed and implemented properly, complement each other. Monetary policy can still pursue its course following low inflationary pressures, while the macroprudential measures can be used to address early risks developing under a low interest rate environment. On the other hand, macro-prudential measures can also be used to mitigate risks from incoming capital flows, in an environment of relatively high real interest rates. Instances of conflict among the two policies should not be neglected though. These instances can be more pronounced if the objectives of the two policies are wrongly defined in a certain financial situation, or respective tools are used out of their scope. For this reason, I believe that it might be helpful to uphold the monetary policy as the primary objective of the central bank. Stabilizing inflation should be something that central bankers may be proud of, something that we should cherish and continue to strive for. But we must recognize that financial stability issues and related macro-prudential measures have to gain significantly more grounds in central bank discussions and decisions. Clearly, the course of the monetary policy will continue to be extensively discussed in the future, based on our improved understanding of the role of asset prices and financial frictions. Incorporating financial stability objectives with the inflation targeting regime we have considered in Albania as an opportunity to understand and address economic developments and potential macrofinancial risks, in order to preserve long-run economic stability.