Can EU anchor Turkey again?

Can EU anchor Turkey again?

The Turkish Central Bank’s decisions have attracted attention recently as the Turkish economy runs out of “success stories.” The private sector has started to see central bank policies as an anchor. However, it has been widely argued that the national lender’s decisions, especially the ones concerning interest rates, no longer serve as an anchor.

Last week, I discussed the central bank’s latest interest rate decision with a businessman and the general manager of a bank. Even though I did not expect the bank to deliver a half point rate hike, I still believed such a move could have a positive impact on the markets. However, both the businessmen and the bank manager plainly said: “Nothing would change.”

Apparently almost everyone has started to believe that the central bank is not taking the fight against inflation very seriously due to political pressure. The businessman said even if the central bank does raise its rates, nothing would change, because the current economic outlook requires more than that. For economic growth to accelerate, more radical decisions should be taken, he said.

He also answered in the affirmative when I asked him “if he was suggesting that a reform program should deliver shock interest rate hikes as the authorities did in the past.” Inflation would drop and the economy would return to a sustainable growth path only if such drastic measures were taken, he added.

The bank manager acknowledged the low morale among bankers and businessmen, and said this mood stemmed from the fact that nobody was able to foresee the future. Nobody cares about the central bank rates anymore, what really matters is the Treasury’s borrowing rates, he said. The current environment is unlikely to bring about a sense of revitalization and they do not see either the political will or the necessary cadres in the state bureaucracy to create such a favorable environment, he added.

The banker also stressed the Credit Guarantee Fund’s inability to keep the economy going indefinitely. Since the start of the year, demand for credit has been weak. Only state-owned banks have increased their credit volume while private banks have been rather cautious because of the lack of predictability, according to the banker. Both the businessman and the banker also noted that in these circumstances, it would be difficult to secure much-needed external funds to support economic growth.

Afrin operation spells trouble

The reforms carried out between 2000 and 2011 together with closer ties with the EU served as anchors for the Turkish economy. This was widely seen as a success story back then. However, this success story has begun to disappear as Turkey, which remained loyal to the reform program until 2007, started to gradually back pedal from the program. More recently, the government has backtracked on several political and economic reforms.

The government has recently moved to mend ties with the EU as relations with the U.S. deteriorate. Business circles are now asking “if the EU could become an anchor again.” According to the coalition protocol inked between Germany’s major parties, for Turkey-EU relations to revive Ankara should improve its human rights records and bolster democracy.

Moreover, as part of the preconditions to revive Turkey-EU relations, the protocol also calls for Turkey to end the state of emergency rule and stop arresting journalists and lawmakers. Some businessmen think the AKP has been left with little room to maneuver and may prioritize taking steps toward EU membership again.

On the other hand, a number of commentators stress the AKP’s plan to secure support from the Nationalist Movement Party (MHP) in the upcoming 2019 elections. They argue that the AKP’s reliance on the MHP to win the elections as well as the ongoing Afrin operation may hamper efforts to take steps to improve ties with the EU. In sum, Turkey faces unprecedented political and economic dangers and there is a growing risk that a ship without an anchor may drift away.

Erdal Sağlam, hdn,