Tim Gosling in Tirana -

Albania was one of only two European countries not to fall into recession in 2009 and Prime Minister Sali Berisha claims the economy will withstand the second wave of the crisis thanks to the government's reform programme. However, to push through the most crucial reforms, analysts say the PM has to nurture the recent thaw in relations between the two main political parties.

Whilst debate rages over the EU project as it slides deeper into crisis, Berisha is unequivocal in asserting that "EU integration is the top priority of the country." However, Brussels announced in November that for a second year running it would not recommend Albania as a candidate country to join the EU due to a two-year political logjam that has delayed important economic reforms - reforms that would help as the crisis in Europe grows.

Although some colleagues clearly exhibit anger over the EU's decision, Berisha appears to accept Tirana's responsibility. "I fully understand Brussel's right to insist that the reforms are voted through. EU integration is a process based on a universe of reforms. My government takes it entirely and totally as a performance-based process. This is an issue for Albanians to solve."

After two years of stalemate, it would be easy to dismiss this as rhetoric, but the prime minister appears to have finally engineered a détente - temporarily at least.

Following disputed elections in 2009, the opposition Socialist Party under Edi Rama boycotted parliament, thereby blocking new legislation that requires a three-fifths majority to pass. However, Berisha offered a number of significant concessions to Rama - such as inviting him to consult on new election legislation - and the opposition reappeared in parliament late in 2011.

Although Berisha points out that the government has had enough votes to implement reforms throughout - Jozefina Topalli, speaker of the parliament and deputy chair of the PM's Democratic Party, says the boycott has only derailed four draft reforms whilst she's "passed around 400 in the meantime" - blocked legislation includes central issues such as a much-needed Administrative Court.

Replicating resilience

Despite this, Berisha insists that his government has "set up an economic system that resisted the 'bubble crisis' and is resisting the debt crisis."

Albania and Poland were the only countries in Europe to avoid recession in 2009, with Tirana reporting growth of 3%, following it up with 3.5% in 2010, according to the World Bank. However, the IMF worries that the momentum is slowing and that 2011 saw the economy expand by no more than 2.5%.

That same pair expects no more than 2% growth in 2012, but Berisha brushes off the concerns over the 4.5% target on which his government based its 2012 budget. "We're ready to review the budget in June if we need to, but the objectives will remain the same," he retorts. "We have space on spending," he claims, without expanding, whilst he points out that any privatization proceeds are not included in the plan, calling them "a reserve."

"The debt crisis is affecting us," he admits, "but I'm confident that Albania will prove resilient once more thanks to the dynamism of the economy."

Whilst some suggest that the early development stage of the economy, alongside its small size, have helped significantly, Berisha naturally gives his own government the lion's share of the credit for introducing a host of free-market reforms, even if critics do suggest that the process is piecemeal and hampered by chronic corruption and administrative problems. "The only protection against crisis is to assist business," the PM says, outlining his ongoing campaign to cut red tape and simplify taxation and other fundamental systems. "The key in 2009 was small government, low taxes and a healthy business climate. It also helps that the banking system is small and strictly classical."

However, others worry that the reforms may have swung too far the other way. The IMF has even sharply criticized the country's 10% flat tax rate, saying it should be raised to help reduce debt. Berisha is adamant the tax rate is appropriate, saying: "I'm a deep believer in low tax. I think you need to leave as much money as you can in private hands. They use it in a much better way."

Leaving that cash in private hands won't help much with the worrying level of state debt, however. Whilst in a Europe-wide context state debt is relatively low at 60% of GDP, in terms of Emerging Europe and the Western Balkans it's a high figure.

However, shrugging off recommendations from both the IMF and the central bank, the government plans to increase debt to as much as 63% of GDP by the end of the year, in no small part because it wants to continue funding its large road-building programme - another element that helped stave off recession in 2009, according to the PM, who points out that 70% of state debt is local currency and apart from €200m the rest is owed to the international institutions.

Needy neighbours

Others are concerned that the government is overconfident in its ability to maintain the status quo. "Economic growth in the country has been financed in the last 20 years by raising debt ... remittances and foreign direct investment," then-governor of the central bank Ardian Fullani pointed out last year, expressing his concern that all of these funding sources look likely to dry up.

It's somewhat worrying then that Berisha appears surprised to be asked what plans the government has to make up for the inevitable loss of trade and investment stemming from Albania's two biggest partners: Greece and Italy. The same pair also powers over 10% of Albania's GDP via remittances, with over 1m Albanians reported to work in Greece and around half that number in Italy. The volume of cash heading back to Albania has been diminishing over the past few years of crisis, according to the Bank of Albania.

A full 65% of Albania's exports go to those two struggling economies, and the PM admits "it's a concern," but suggests it's not an overwhelmingly serious one. "Exports grew 22% year on year in the first nine months of 2011, but our economic model is not so focused on growing exports."

Berisha clearly hopes that Albania will be able to find the investors to help FDI levels make up for the shortfalls, and outlines privatisation plans for oil and gas company Alpetrol, as well as four hydropower plants and an insurance company. He also has high hopes that Albania and its partners in the Trans-Adriatic Pipeline (TAP) gas pipeline project will succeed in bidding to carry 10bn cm a year from the giant Shah Deniz II field in Azerbaijan to European markets.

However, the question of investment brings the focus back full circle onto Albania's progress towards EU membership. If Berisha can steer the delicate détente with Rama onwards and secure the next step in the EU accession process, it could prove a real shot in the arm for Albanian FDI. No one is ready to discuss in public the consequences of a third refusal by the EU.