Cicero Policy Briefer

Issue 18, November 2007

European Country Profiles: Turkey

By Chris Jackson

It’s nearly time for the Christmas party season, and with that come poor jokes in shabby crackers. Such as: “Why did the turkey get invited into the band? Because it had the drumsticks.” A different Turkey may not be so lucky, though: it has the (economic) drumsticks, but the rest of the band is moving to a different political beat.

It could be 10 years at the earliest before Turkey joins the EU, and it’s fair to say that Europe hasn’t exactly embraced this rather unconventional European. Frequently portrayed as poor, overpopulated and economically unstable, Turkey has for its part focused on addressing the latter issue.

The economic crisis in Turkey in 2001 illustrated the risk attached to emerging markets: a clash between the President and Prime Minister of Turkey over banking reforms led to a significant loss of confidence in the domestic market and resulted in the lira losing 40 per cent and inflation ballooning by 70 per cent. Though such an event could be used to show the dangers of absorbing a nation like Turkey, times have now changed—and so too has Turkey and its relations to the EU.

Following the economic crisis, Turkey implemented a number of reforms to the banking sector, which reduced the quantity of banks, regulated the banking sector in a more structured manner and led to a truly independent central bank. With Turkey now on the road to accession, its banking sector has been firmed up and is displaying signs of resilience to market fluctuations. Despite the current and past political instability the markets remain steady in Turkey, as the central bank has successfully managed interest rates to keep investors returning.

Institutional change has been matched by large flows of foreign direct investment, which have supported the country’s structural economic changes. Turkey is no longer exporting just T-shirts and nuts: industry has evolved. It is a leading producer of cars, while nearly half the TVs purchased in the EU are made in Turkey. Investment is not only limited to manufacturing; it now encompasses financial services, in particular banking. Back in 2001 foreign capital in Turkish banks was practically zero, whereas today it represents 40 per cent of the total; and neither are such developments limited to banking, with half the insurance industry in Turkey owned by foreign companies.

The potential for investment in Turkey is enormous and already being realised. It possesses a large domestic market, a strategic location and a low-cost labour force which is both young and well-skilled. If it was a question of economics, then Turkey’s passage to Europe would not be so bumpy-but the issue has become political. The question of Turkish entry reminds me very much of the choice faced by the UK in 1976: although not politically desirable at the time, economic sense ultimately prevailed. At present, though, the debate surrounding Turkey is inherently political and dictated by xenophobic sentiments, while the economic arguments receive little or no coverage. It is time for those in business to support Turkish membership and make their feelings known. If Turkey’s accession is not supported, instability may well return to the country, damaging current and future investment opportunities. Let’s not allow others to cut off our important economic noses in favour of political face.

Chris Jackson can be contacted on +44 (0)20 7665 9530 or click here to email.

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