At the same time, central banks in a number of countries (including Turkey and Ukraine) have raised interest rates in response to capital outflows. However, the Central Bank of Turkey has subsequently reversed some of those interest rate increases. Moreover, the Central Bank of Russia increased its policy rate by 150 basis points (to 7 per cent) with effect from 3 March 2014 against the background of events in Crimea, stronger net capital outflows and persistently high inflation. Further rate increases followed in April and July 2014.

In January 2014, Latvia became the fifth country in the region to join the eurozone, following in the footsteps of Slovenia, Cyprus, the Slovak Republic and Estonia. Lithuania has been given the green light to follow suit in January 2015.

Primary fiscal deficits (that is to say, fiscal deficits net of the cost of servicing public debt) generally declined in 2013 relative to 2012, reflecting a slight tightening of fiscal policy (see Chart M.13). In some countries, notably in the SEE region, stronger economic growth contributed to increases in government revenues. SEMED countries continued to run sizeable primary fiscal deficits, partly reflecting the high fiscal cost of fuel subsidies. At the same time, all countries in the SEMED region adopted measures aimed at reducing energy subsidies, which should help to improve fiscal sustainability over the medium term. In Slovenia the general government deficit more than tripled compared with the previous year, owing to the considerable cost of recapitalising banks.

Looking ahead, countries in the region may find that they have less scope to combine fiscal tightening with accommodative monetary policies. In particular, when interest rates in advanced markets start to rise, there will be less scope for monetary policy easing, and monetary authorities may need to tighten policies in response to changes in cross-border capital flows.