G-20 Talks: How to Achieve Economic and Political Stability in Turkey?

After almost a decade of impressive economic and political progress starting in 2002 with the election of the single ruling AK party, Turkey is again on the verge of economic and political upheaval. Turkey seems to be caught in a vicious circle of political and economic turmoil in a ten-year cycle, forcing the country to relaunch a rule-based political and economic system every decade after a period of successful liberalization and modernization.

Turkey is currently at a crossroads and on the verge of sinking into one of its deepest economic crises to date against a backdrop of political uncertainty. This tragic situation did not come about overnight, but has gradually deteriorated since 2009. After the global financial crisis in 2009, emerging economies were confronted with increasingly risk sensitive international investors.

This, in turn, made it more difficult for Turkey to attract the foreign capital needed to finance its progress. At the same time, industrial countries started to initiate new free trade agreements with strategic partners in the hope of stimulating their struggling domestic economies by boosting international trade. The EU, for example, began negotiating preferential trade agreements with the USA (Transatlantic Trade and Investment Partnership, TTIP), Japan and six other new partners.

These developments in international trade policies and greater caution on the part of global investment both hit Turkey hard. In a comprehensive study commissioned by the GED Project of the Bertelsmann Stiftung, the ifo institute illustrates how the EU’s new trade policy is going to affect Turkey.

The study finds that, if concluded, new free trade agreements (FTAs) will lead to far more negative welfare effects for Turkey in the long term than would have been the case in the absence of negotiations.

Institutional weaknesses in the organisation of the European customs union (of which Turkey is part) constitute a major reason why new FTAs by the EU pose a threat to Turkey’s economy.

As a result of the customs union agreement with the EU and the corresponding principle of joint customs harmonization for third countries, Turkey is obliged to open its market to respective third countries if the EU signs a free trade agreement with them.

In return, Turkish companies can establish free commodity trade with the EU28 states, but cannot receive any of the benefits negotiated for European exporters to third countries.

Hence, the EU – Turkish customs union, which can be seen as the backbone of Turkey’s economic successful integration into the European home market, has started to turn into a risk factor, as trade on such a basis is not sustainable.

An EU-Turkey type customs union framework not only poses an economic problem, but also puts politicians under massive political pressure for understandable reasons. No country will accept a trade agreement that forces it to open up its own market while barriers in the corresponding partner country still remain in place.

European and Turkish stakeholders, including government representatives, started to look for a solution that allows a sustainable improvement in trade relations between Turkey and the EU some time ago. These bilateral efforts resulted in an EU Turkish joint action plan.

In May 2015 the Turkish government, together with representatives of the European Union (EU), issued a Memorandum of Understanding with the objective of modernising and expanding the existing customs union between the two parties.^[1]

Major aims in the modernisation of the customs union include: 1) introducing a dispute settlement mechanism, 2) the removal of road quotas and transit permits for Turkish transporters hindering the free circulation of traded goods, 3) the elimination of economic discrimination against Turkey in the EU’s new FTAs with third parties, 4) the inclusion of the agricultural and service industries in the trade agreement, 5) regulating public procurement legislation, and finally the abolition of visas for Turkish business travellers.

While the roadmap to amending the incomplete custom union agreement between Turkey and the EU is clear, no official negotiations to this end have been started to date. The majority of EU politicians are clearly reluctant to begin bilateral trade negotiations due to political developments in Turkey in recent years.

In the wake of the migration crises, bilateral relations between Turkey and the EU appeared to stand a chance of improving. Indeed, with the so called migration deal, the EU member states and Turkey initially agreed to open further negotiating chapters (16 out of 35) to progress towards Turkey’s full political membership of the EU.

However, the failed coup d’état attempt in 2016 triggered a dramatic reshaping of the public administration in Turkey. The set-up of a presidential system — after a narrow referendum – accompanied by a strengthening of presidential executive powers, and the simultaneous cut-back of checks and balances, increased political tensions between the EU and Turkey.

In a political reaction to these developments, the European Parliament voted in favour of suspending the recently agreed opening of new accession chapters.^[2] By contrast, the European Commission – as the institution responsible for European trade affairs – asked the EU Council in December 2016 for a mandate to launch talks with Turkey to modernize the existing customs union. To date, however, no mandate has been given.

With their indecisiveness over how to regulate economic relations between the EU and Turkey, European policymakers risk accelerating the economic crisis faced by the country. Turkey has managed to create some breathing space by increasing its public spending accompanied by a weak Turkish currency, which resulted in significant positive economic growth in the first quarter of 2017.

If, however, the EU and Turkey fail to normalise their economic and political relations, Turkey’s economy is undoubtedly at risk in the future. The implications for its already unstable political situation are equally negative.

How can Turkey stabilise its economy in the short term?

This week Germany will host the G20 meeting in which Turkey will participate with one of the biggest delegations. At this meeting the heads of the world’s leading economies have the chance to support the Turkish nation.

One clear way to achieve this goal would be to back the modernization of the EU-Turkish customs union. Germany, as host of the G20 meeting, bears a special responsibility in these difficult times. German companies have been major investors in Turkey for years.

Over the past 2 years Turkey has experienced a substantial outflow of foreign capital due to its domestic political conditions. However, it is worth emphasizing that EU and German enterprises in particular have maintained a greater presence in the Turkish market than many analysts would have expected.

The European private sector has a strong interest in a modernized EU – Turkey customs union and supports the EU Commission’s request to update the trade accord.

The G20 states and the EU are in search of a more stable world and have declared their intention to use international trade policy as a means of supporting struggling economies.

The Turkish nation is urgently in need of such support. Sending a positive signal from the G20 meeting by promoting the EU-Turkish customs union modernization would be a good opening gambit.

Neither the EU nor Turkey can afford to waste time. Further destabilization in Turkey will not only hurt the Turkish people, but will also negatively impact the rest of the world, and particularly the EU.

[1]    EU-Turkish Memorandum of Understanding: http://ec.europa.eu/commission/2014-2019/hahn/announcements/eu-and-turkey-announce-modernisation-custom-union_en.

^[2] In November 2016 MEPs adopted a resolution asking for the membership negotiations to be suspended while repressions continue in Turkey.