Turkey’s Looming Economic Chaos Threatens European Economies
While Turkey was boasting about its ability to exert pressure on the European Union (EU), its economy could be on the brink of collapse. Turkey’s President Recep Tayyip Erdoğan threatened to open the gates, letting out hundreds of thousands of refugees into the EU.
Erdoğan needs some nationalist distractions. His Justice and Development Party (AKP), once praised for its economic—if not political—policies, is no longer unassailable. Higher interest rates would greatly raise the risk of a recession. The resulting political risk would have a spillover effect for the euro and European markets in general.
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The “open the gates” reference is to Turkey’s agreement to stop the flow of migrants, signed last March 18. But Erdoğan’s strongman posture rests on economic quicksand. The state of Turkey’s economy is worrying. The Turkish lira continues to depreciate. (Source: “Erdogan Says Turkey Faces ‘Economic Sabotage’ as Lira Plunges,” Bloomberg, December 3, 2016.)
In response, Erdoğan urged his fellow citizens to convert their foreign currency into Turkish lira or gold. The lira has lost over 10% of its value over the past two months against the dollar. But the devaluation has not helped the economy.
Turkish Central Bank Will Have to Intervene
The risk is that the Central Bank of Turkey will intervene to protect the lira from further fallout. Meanwhile, the general economic climate has worsened. Oil prices are going up because of last week’s OPEC accord, putting further pressure against the Turkish lira.
It must be said that the situation is getting worse day-by-day. The Turkish national currency has set new record lows against the greenback. In November alone, the Turkish currency depreciated by 10% against the dollar. The U.S. Federal Reserve’s likely interest rate hike won’t help.
The phenomenon is especially problematic, given the political uncertainties and difficult Middle East situation. The economic pessimism also finds fuel from the slowdown in growth and rising tensions since the failed July coup.
Investors are also worried about the frequent interventions of the Turkish president in the country’s economic affairs. But, investors and governments in Europe should also be worried. The difficult economic situation in Turkey could prompt Erdoğan to grow bolder with the EU.
The Turkish president could deploy his migrant threat, putting pressure on European governments at a delicate political moment, turning sentiment further to the right and away from the euro. Indeed, even as relations with Europe have deteriorated, the Turkish Parliament could vote for a constitutional reform to strengthen Erdoğan’s powers further.
