Turkey Economy: What Crisis?

With an IMF standby accord in place, Turkey has so far weathered the fallout from the EU's woes

Turkish financial and business circles are insisting that the EU's crisis will not harm the prospects for investment and continued economic growth. Ankara is due to start accession negotiation with Brussels on October 3, but the closer the talks get, the more distant membership prospects appear to become.

In late May and early June, French and Dutch voters rejected the proposed EU Constitution. According to Ankara, the voting in no way reflected public opposition to Turkish EU membership. Some Istanbul analysts even argued that a looser Union, without a constitution, would be easier for Turkey to join. But at the EU's heated mid-June summit, even the French president, Jacques Chirac, who had previously supported Turkey's case, argued that the EU would become unworkable if expansion went ahead in the absence of a constitution. Nicolas Sarkozy, the French interior minister an a likely successor to Mr Chirac, later called for the EU expansion process to be suspended.

The leader of Germany's Christian Democratic Union,Angela Merkel, who is likely to become chancellor in a snap election later this year, is openly in favour of a "special status" rather than full membership for Turkey. Relations between Ankara and Berlin are strained over an Armenian resolution approved by the German parliament on June 14th--the same day as EU member country ambassadors in Ankara warned the Turkish prime Minister, Recep Tayyip Erdogan, over the pace of democratic reforms, particularly in the mainly Kurdish south-east. Meanwhile, the summit failed to agree on the budget for 2007-2013, plunging the Union into further disarray, and isolating the UK, one of Turkey's leading backers.

Slow track

EU membership was never going to be quick or easy. When the EU agreed last December to begin accession talks, it made clear that membership would not come before 2014, and would require separate final approval from all EU members. Even if the talks led to membership, Turkey might not benefit fully from freedom of movement of persons, or from structural or agricultural policies. In the meantime, strict benchmarks would be set for the opening of talks in each policy area. Turkey's human and minority rights record would remain subject to close monitoring, and talks could be suspended in the event of serious infringements.

Even on these conditions, Turkish financial markets, business organisations and the mainstream media last December welcomed the advent of the accession process on the grounds that it would increase the incentive for the government to follow macroeconomic stability policies and regulatory reforms. A surge in foreign investment in banking, retail and other sectors and growing interest in the Turkish privatisation process are partly attributed to expectations of an economic and business environment converging on the EU.

Now, the EU is expected to reiterate its caveats strongly in the framework document setting out the mode of negotiations. Despite all the omens, financial analysts and business officials deny that the credibility of the accession process--and its consequent potential for reassuring investors--has been undermined. Mustafa Koc, chairman of Koc Holding, Turkey's largest conglomerate, told an international gathering in late June that the EU would need Turkey's enterprising spirit in the long term in order to hold out against competition from China, the USA and India.

Opposition politicians are not so upbeat. Before starting the talks, Ankara is obliged to sign an additional protocol formally acknowledging the Greek-Cypriot government as a partner under the existing Turkey-EU customs union. Main opposition Republican People's Party (CHP) leader Deniz Baykal is openly calling on the Justice and Development Party (AKP) government not to sign the document, which he says would be tantamount to acknowledging Greek-Cypriot sovereignty over the whole of Cyprus. Although public opinion favours EU membership in principle, the AKP, CHP and other parties will continue squaring off on how to handle Brussels in practice--among other contentious issues--ahead of the presidential and parliamentary elections in 2007.

Another anchor

Turkey needs financial as well as direct foreign investment to roll over its foreign debt and to offset a large current account deficit--a deficit, incidentally, which a weakening euro and stagnant West European export markets can only exacerbate. Fortunately, the EU process has been only one source of investor confidence.

Since the financial crisis of 2001, inflation has been slashed to single figures, and the budget has come to produce regular, large primary surpluses. GDP growth reached 8.9% in 2004. A new US$10bn standby accord was concluded with the IMF in May, locking in three more years of financial relief, and regular Fund monitoring of fiscal and structural policies. Even if the EU "anchor" wobbles, this IMF support should serve to reassure investors. Failure to implement IMF-agreed policies or a sharp tightening of global liquidity would pose a much more immediate challenge to the lira, stability and growth than the vicissitudes of EU politics, even in the unlikely event of a no-show in October.