When one additionally considers our many exports to neighboring, non-EU countries, but who maintain a Euro-centric policy we can see an indirect detrimental effect; which in turn means roughly 90% of our exports were hit by the crisis. For example, we experienced a decline in GDP of 1% in 2009 with a recovery of 3% in the next two years before declining again by –0.4% in 2012; which is reasonably low when compared to other countries in the region. Although this does not mean the effects from the Euro Zone crisis were not harsh, they clearly were; however, there were compensating policies such as a fiscal stimulus from the government which substantially mitigated the negative impact which is most likely why Macedonia had the slowest decline in the region. What were some of those hedging fiscal policies? Traditionally, Macedonia has had low fiscal deficits, ranging from –1% to +1%, but during the crisis in 2009 this grew initially to 2.5% then to 2.8% with our highest in 2012 at 3.8%. This year, due to the financial stimulus we are forecasted at 3.5%. We were able to mitigate successfully because our public debt was low at around 20% of GDP which afforded us room for expansion which we used during this crisis period. Apart from the macro-economy concerns, the crisis with the Euro as a currency helped boost confidence in our domestic currency [MKD denar]. This is because people naturally began to wonder what would happen with Europe; therefore, its primary currency.
Therefore, our macroeconomic forecasting and monetary policy analysis models prescribe an important role to the exchange rate. Furthermore, in financially euroized economies, such as ours, exchange rate movements tend to have financial stability implications. Rapid depreciation increase NPLs, while prolonged periods of appreciation tend to impose financial risks and encourage further euroization. In designing the appropriate monetary policy response, we have to distinguish between trend movements driven by fundamentals, and short term volatility driven by sporadic factors or market imperfections. Inflation targeting central banks should strive to avoid leaning against trend movements in the exchange rate. As long as these movements are in line with fundamentals, these trends represent structural adjustments that do not move the economy away from equilibrium. On the other hand, short term exchange rate volatility is normal in a fully flexible exchange rate regime. The reaction of central banks should depend on their impact on inflation, which in itself depends on the intensity and duration of such volatility. The stronger the duration and the higher the intensity of the shocks, the bigger would be the expected impact on inflation, the greater the risk of rapid shifts in inflation expectations, and the higher the need for a systematic reaction of monetary policy. 3. Exchange rate movements and the Bank of Albania reaction to them  The above mentioned facts have guided our reaction to the recent appreciation of the exchange rate in Albania. The trend appreciation started around the second half of 2015, but it gathered considerable pace in 2018.