Turkey is part of Europe
What surprised me most this week was not the depreciation of the Turkish lira against the US dollar. That was to be expected. What surprised me was the simultaneous depreciation of the Euro against the US dollar. The Euro-USD rate was at 1.16 on Thursday, and declined to 1.14 on Friday. Why did this happen?
Turkey is now considered to be a growth restraint on Europe. Analysts say that Turkish companies are all indebted to European banks and the figures are impressive, I have to confess. I have been following the peso and lira in their race to the bottom since the beginning of the year. The Argentinian peso has lost around 50 percent against the US dollar this year. As of the depreciation last week, the Turkish lira has lost around 66 percent against the US dollar.
But why this Turkish threat to Europe? It’s all about Turkey’s European accession process. The process started in 2004, and Turkey’s corporate debt nearly doubled between 2004 and 2008. Being a prospective member of the EU lifted the borrowing constraints on the Turkish corporate sector.
Let me give you a few figures. Turkey’s current account deficit was an average of 1.7 percent of GDP between 1975 and 1989. Yet it increased to around 4.8 percent between 2003 and 2016. If you take the latter number as underlining the level of the rising savings deficit in the Turkish economy, then the Europeanization process increased the vulnerability of the Turkish economy. This was not unique to Turkey. It happened in Portugal, Spain, Greece, and more recently in Moldova and North Macedonia in their European accession processes, too. Now is the time for Turkey to pay the bill.
Why this has happening now? It’s all a technical correction, if you ask me. Financial markets are now looking for actions rather than words. Turkey’s new government has been dithering, talking about grand political narratives without any real signals for the markets. At a time of turbulence, financial market participants are taking decisions by looking at their watches, not by looking at the possible progress of a tedious and months-long policy making process.