ardian fullani : effects of the exchange rate regime speech by mr ardian fullani, governor of the bank of albania, at the lecture of the governor of the central bank of the republic of turkey, mr durmus yilmaz, entitled " current global financial crisis and recent developments in the turkish economy and monetary policy ", istanbul, 24 september 2009. * * * ladies and gentlemen, it is my great pleasure to give the greeting speech in this joint meeting, in which our dear and honourable friend, the governor of the central bank of the republic of turkey, mr. durmus yilmaz, will address very important theoretical and practical issues related to the most recent global developments, sharing at the same time his experience in turkey. the global financial crisis hit all the advanced economies severely. it certainly affected the emerging economies of south - east europe, our two countries are part of. the contraction of global economic growth, the decline in foreign trade, the higher risk premiums, the interrupted functioning of the credit system and the rush to get liquidity affected our economies as well. these economies remain closely related to the euro area economy through a number of trade and financial channels. the response of fiscal and monetary policies to this crisis is of prime importance ; this aspect will be thoroughly elaborated by our dear friend. however, i would like to briefly address an aspect of macroeconomic and institutional framework, which has been an important determinant of the extent and magnitude of the national authorities ’ response to the crises : the exchange rate regime. a quick glance at the current developments in the region and broader allows us to draw the conclusion that the countries adopting a fixed exchange rate regime have been affected by the global crisis proportionally higher. moreover, they have been more constrained in terms of responding to the crisis. by contrast, countries adopting a free floating exchange rate regime have been affected by the crisis more mildly and smoothly, and they have preserved higher independence in their economic policies for the mitigation of crisis effects. obviously, this is not occasional : the free floating exchange rate regime is an important political, economic and institutional investment of emerging countries. their sacrifices in terms of building reliable monetary and fiscal policies, enhancing public confidence in the respective currencies and national financial institutions are rewarded with the flexibility this regime provides to macroeconomic policies in coping with the crises. exchange rate volatility mechanism is precisely a mechanism that allows the economy to absorb various shocks. the free floating exchange rate regime, devoted

summer, the diagnosis of the economic situation in the eurozone was bright. the outlook was seen as favourable, supported by both the external and internal pillars of demand. according to the june 2007 eurosystem staff projections, gdp growth in the euro area was projected to be close to 2. 6 % in 2007 and 2. 3 % in 2008. obviously the turbulence in financial markets has clouded the prospects to some extent. the potential impact of this turmoil on the real economy is still difficult to assess. so far the effects have been limited. while euro area consumer and business confidence indicators declined in september, and most of the early indicators available fell slightly in october too, they were still above their historical averages and continued to point to ongoing sustained growth during the second half of 2007. very recently, the imf staff forecasted real gdp growth in the euro area at 2. 5 % in 2007 and 2. 1 % in 2008 and most private sector forecasts are close to these numbers. as regards the short – and medium – term outlook, i would make a distinction between the main scenario, which is the most likely outcome, and the risk assessment. the most likely scenario remains favourable with growth still close to our potential but it is now surrounded by much more uncertainty than usual. and that applies to other regions of the world. world economic growth is expected to remain robust over the medium term, despite the slowdown of the us economy, because the emerging market economies should continue to expand at a rapid pace. as the recent imf world economic outlook points out, china, india and russia have together accounted for half of global growth over the past year, and further strong expansion is also expected in other emerging markets and developing countries. this trend should improve living conditions and income for a large part of the world's population. it is also a source of continued support for euro area exports and investment. however the slowdown in the us economy could be more pronounced and the us dollar exchange rate could come under renewed downward pressure. in these conditions, it remains to be seen whether the recent signs of emerging economies de - coupling from us developments will usher in a sustainable process. another crucial question is whether the euro will continue to bear more than its share in the resorption of global imbalances. here i refer to the continuous strengthening of the exchange rate of the euro not only vis - a - vis the us dollar but also vis - a - vis the currencies of countries recording year after year