The remarkable success of the Central and Eastern European countries of achieving EU membership after a thorough transformation and rapid growth of living standards undoubtedly holds a lot of recommendations and lessons for the South Eastern European countries. These countries had similar, maybe even more advanced starting positions than the other transition countries, but South Eastern Europe is now lagging far more behind in terms of progress towards the EU. However, we should bear in mind that the main reason for this is definitively the political instability and war conflicts in the region, which understandably prevented faster economic transformation and reforms. Luckily, it appears that political support for EU accession and the determination to pursue EU membership, including all the necessary economic and political reforms, are strengthening. In analyzing the economic developments in the region of South Eastern Europe, some notable differences with the CEE countries appear. South Eastern Europe has much lower pace of reforms and lower growth rates. Related to this, capital inflows in the region have been much smaller and have shown a much bigger dispersion among countries, ranging from 834 USD per capita in Albania to 3,932 USD per capita in Croatia, cumulatively in the period 1989-2007. 12 Credit expansion has been high, but has still to reach rates and length of the one seen in more advanced transition countries. Consequently, there have been less demand pressures as well as comparatively lower inflation than in the other countries, although inflation has been rising recently.
Thus in the period 19942006, the cumulative appreciation of the real effective exchange rate ranged from 8% in Slovenia to 105.9% in Lithuania. 8 Economic theory offers arguments that real exchange rate appreciation is not dangerous as long as it reflects changes in the equilibrium real exchange rate. However, policy makers in these countries, especially in the recent years, are not really comforted by these theoretical discussions which consider that real appreciation is only movement to equilibrium. What they are seeing in their countries are common signs of overheating of the economy and loss of competitiveness, which deepens the external imbalances. In the beginning of transition, current account deficits were understandable and not too much cause for concern, as these countries were importing technology and previously unavailable goods. However, the size of the deficits in the last several years exceeds the level that is usually deemed sustainable. Thus, the current account deficit in the new member states in the period 1996-2005 ranged from 5% to 7.7% of GDP, but in the last two years it has been reaching 10.1% and 11.3% of GDP. The average current account deficit in the SEEU countries in the same period is even higher, and it is estimated that in 2007 it will reach 16.3%. 9 Even though deficits are projected to fall in some of the countries, in general they remain a cause for concern in most of them. Besides the trade deficit which,  7  Source: IMF World Economic Outlook Database, April 2008. 8  Source: Eurostat.