Five years of the Stability Pact for South East Europe
Remarks by Fabrizio Saccomanni
Chairman of Working Table II - Vice President of the EBRD

It is indeed a very special pleasure for me to address this meeting celebrating the fifth anniversary of the Stability Pact for South East Europe. This is because I believe I am the only member of the Stability Pact’s small but highly dedicated team to have been on duty for the full 5-year existence of the Pact.

It was just after the Sarajevo Summit in the Summer of 1999 that I was asked by the Italian Government to present my candidature for the Chair of Working Table II. I was appointed Chairman in September at the first Regional Table meeting in Brussels and chaired the first meeting of the Working Table in October in Bari.

In accepting this task, I was motivated essentially by the deep conviction that the international community, and the European Union in particular, had the moral obligation to assist this region in restoring peace and democracy and in creating the basis for strong and sustainable growth. I had no special expertise on the Balkans and had only visited Yugoslavia in 1979, on the occasion of the Belgrade meeting of the IMF and the World Bank. But I had spent all my professional life at the Bank of Italy working on international monetary and financial issues in the framework of multilateral institutions. In the Summer of 1999, as the EU was celebrating the creation of the Economic and Monetary Union and of its new currency, a project on which I had been working from the very beginning, I felt that moving to the Stability Pact would be the logical continuation of the EU strategy to create “a zone of economic stability in Europe”.

As I visited all the countries of the Region in the Winter of 1999 and consulted with the representatives of major donor countries and international financial institutions, two key issues became clear to me: one, the donor countries and international institutions, although willing to resume and intensify assistance and financing in SEE, had not yet devised a comprehensive or consistent strategy to address the economic challenges of the region; two, the countries of SEE, although all willing and keen to rejoin the international community, were not yet prepared to cooperate with each other in the pursuit of economic strategies of a regional nature. I believe the Stability Pact has played a fundamental role in radically changing these attitudes.

A regional strategy was rapidly outlined under the leadership of the World Bank and the European Commission with the collaboration of all relevant international institutions and was formally endorsed by the WTII in February 2000 in Skopje. To implement the strategy, it was agreed that the EIB would act as leading agency for infrastructure development and rehabilitation; that the EBRD would take the lead in private sector development projects; and that the OECD would coordinate efforts to promote private investment, both foreign and domestic. In all these areas, major achievements have been recorded. Suffice to recall that two regional donors’ conferences were held in 2000 and 2001 under the aegis of the Stability Pact and that a permanent Infrastructure Steering Group was launched at the initiative of WTII to monitor the implementation of regional projects.

A new cooperative approach to regional issues was firmly and patiently promoted by the Stability Pact and now all countries in the region are cooperating bilaterally and in regional fora, to an extent unimaginable five years ago. This has been reflected most visibly in the network of bilateral free-trade agreements negotiated and now under implementation by all countries in a very short time. I regard this as one of the major accomplishments of the Stability Pact and of WTII, where the political impulse and the technical preparations for the agreements originated. A similar success story is in the making as regards the creation of a regional energy market.

Economic developments in the region have progressed in parallel with the implementation of the structural and institutional reforms that are at the heart of the transition towards a market economy.

Real GDP growth in SEE has been quite strong and in the last three years it has exceeded 4 per cent, a rate quite faster than that recorded in Central Europe and the Baltics, marking a good beginning for a long-awaited catching up. Growth has been driven by the expansion of the private sector, which now accounts for more than 60 per cent of GDP, and by the expansion of trade opportunities following the liberalisation of intra-regional trade and the improved access to EU markets. This performance, in turn, has been made possible thanks to a larger share of total credit going to the private sector and to a steady advance in the process of privatisation, particularly of large companies. Together with a significant improvement in the business climate, as witnessed by the in-depth analysis conducted by the World Bank and the EBRD, this has led to a growing inflow of foreign capital, both FDI and portfolio funds, which has reached a record level of over $10 billion in 2003.

Despite these considerable achievements, SEE is still confronted with a number of challenges and risks.
As regards economic performance, the level of real GDP in SEE in 2003 was still at about 90 per cent of the level prevailing in 1989, i.e. before the start of the transition process. This is a considerable progress compared with the level of 75 per cent recorded in 1998, but it is still lagging behind the progress achieved in Central Europe and the Baltics, where real GDP in 2003 was at 123 percent of the 1989 level.

Such economic performance reflects a similar delay in the transition process in general. On average, SEE countries are still at about 70-75 per cent of the road to full transition, compared with around 90-95 per cent in Central Europe.

Among the most significant aspects of the lag in transition are the high share of “informal activities” in the economy, which still represents about one-third of GDP, and the low level of financial intermediation. Moreover there is still a lack a new” greenfield” investment, as most of the FDI flows have been driven by large-scale privatisations rather than by the creation of new enterprises. Moreover, despite the strong trade liberalisation effort, significant non-tariff barriers continue to represent a major obstacle to intra-regional trade. Finally, regulation, taxation and corruption remain key constraints to the development of private sector enterprises, particularly SMEs, which can have a significant impact on the creation of new jobs.

On the strength of the progress achieved to date, SEE is now firmly on the radar screens of foreign investors and international capital markets. A window of opportunity has opened up for SEE, as increasingly mobile capital flows have been reallocated away from regions perceived as riskier, such as Latin America, towards Eastern Europe, which is perceived as more stable because of its linkages to the EU and the support of dedicated financial institutions such as the EIB and the EBRD.

But being on the radar screens of the investors does not guarantee actual investment. It merely improves your potential for investment leading to greater attention to, and closer screening of, political and economic developments with a view to making a comprehensive assessment of the risks and returns involved. At present, mostly because of the political uncertainties still prevailing throughout the region, the assessment of markets is generally one of “wait and see”. This may be unfair to individual countries of the region where political stability has been achieved and the reform process is well established, but in the context of globalisation of trade and investment flows, it should not surprise you that the creditworthiness of the region is being regarded as more important than the standing of individual countries. International investors respect and can operate within existing political and institutional realities, but they increasingly require integrated markets, free from trade and foreign exchange restrictions, with reasonable regulatory frameworks and reliable legal systems. In the pursuit of these objectives the countries of the region can count on the support and the assistance of the Stability Pact.

However time is flying by and the Stability Pact by its very nature is a temporary body. The success of our efforts should accelerate first an evolution, and then a gradual phasing out of our role. My wish is that with the help of the SP, the countries of SEE successfully implement the necessary reforms and seize fully the window of opportunity that is open to them. Then, once they are firmly on the path to sustainable political, economic and social development, the SP seeing its task accomplished, can phase out its activities hopefully in the not too distant future.