EU Concergence: South East Europe Six Facing Macroeconomic Challenges

Coping with competitive pressures and market forces within the EU in the medium-term, the South East Europe Six (SEE6) needs to address important challenges through determined implementation of structural reforms. Progress with structural reforms can help for macroeconomic stability, for example, by reducing the structural external deficits. It helps nominal convergence too, as the productivity realizes the improvement of competitiveness and helps disinflation by maintaining low unit cost. Also, the paper is focusing on periods of low inflation and deflationary pressures, when exchange rate anchors do not allow sufficient space for fiscal and monetary stimulus. In this respect, policy makers are under following dilemma: to deviate from exchange rate anchor and increase the space for fiscal and monetary stimulus; to accelerate structural reforms and competitiveness and on short run deepen the recession pressures; and to increase foreign debt and thus increase scope for fiscal and monetary stimulus while preserving the exchange rate anchor