Could Turkey’s Current Economic Situation Pave the Way For Realignment with the West?

The U.S.–Turkey relationship has deteriorated to a new low. The United States recently imposed sanctions on two Turkish ministers and doubled down on higher tariffs after Turkey apparently refused to release imprisoned American pastor Andrew Brunson. The announcement of these measures led the Turkish lira’s value to plummet even further, alarming markets and adding pressure on the Turkish government. Searching for ways to end the currency devaluation, Ankara now turns to the EU. But Turkey–EU relations are also in crisis.

GMF Senior Fellow Kadri Tastan recently spoke with Güven Sak, managing director of The Economic Policy Research Foundation of Turkey, about Turkey’s economic fragilities.

Only a few years ago, despite the structural problems, the impression was that the Turkish economy was doing well. There was growth, inflation was relatively low, and the public accounts looked pretty good. Today we are no longer there, on the contrary, the economic situation is deteriorating and there are concerns of a contagion effect to other emerging economies. How did we get here? And why is the Turkish economy in this situation today?

Güven Sak: It is because of the change in the international financial market. As the world has passed from quantitative easing to quantitative tightening, Turkey was not be able to take the necessary measures to slow down the growth process in time — it is very hard to slow down the growth process intentionally on time — and no country has done this before. It could be claimed that Turkey is a of victim of its own success due to a rapid structural reform period during the EU accession process.

Turkey's central bank has sharply increased interest rates to stop the lira from hemorrhaging and Turkey’s finance minister rolled out the government’s new economic plan last week, promising central bank independence and tighter budget discipline. Do you think the measures taken or announced by the government will be sufficient to allow the Turkish economy to recover? Otherwise, what else should be done by the government? Do you think we will see an IMF bailout in the end?

Güven Sak: In terms of what the government has been trying to do, they are now coming to terms with the reality that this is a classic currency crisis situation that they need to deal with. And that the most important issue is to deal with the expectations of investors, to manage those expectations, to build confidence again. It is the first step to start building investor confidence in order to guarantee that a certain lower rate in Turkish debt is going to be guaranteed in the near future with no need for a front loaded program, so with no need for the IMF. But is it enough? It is kind of a necessary step that the government needs to take, but is it sufficient in order to guarantee that soft-landing in the Turkish economy, calming down the investors? It is not. That issue has also been mentioned between the new economy programs too. They now have to delineate how they are going to take measures to increase public savings in the near future, how they are going to deal with the structural issues of the Turkish economy. The program only says that the average growth trade of the Turkish economy in the coming three years is going to be lower than the long-term averages in terms of the Turkish economic growth.

How will the current situation of the Turkish economy affect Turkey’s relations with the EU and the United States?

Güven Sak: It is effecting in a good and in a bad way. In a good way because vulnerability in Turkey asks Turkey to be in good terms with its allies, there is no question about it, both the EU and the United States, because the international financial architecture dictates that. At the end of the day, if you are not on good terms with the United States then it is very hard for you to continue your relationship with the international dollar markets. And that is why the German foreign minister has mentioned asking for a reform of the international financial architecture in this period. So it is it is paving the way to closer relations, for realigning Turkey with the West. But it is also affecting Turkey in a bad way because it makes Turkey more vulnerable.