Bulgaria's Prime Minister Boyko Borissov, European Council President Donald Tusk, Turkish President Tayyip Erdogan and European Commission President Jean-Claude Juncker attend a news conference at Euxinograd residence, near Varna, Bulgaria, March 26, 2018. REUTERS/Stoyan Nenov - RC11622530E0
From left to right: Bulgarian prime minister Boyko Borissov, European Council head Donald Tusk, Turkey's president Recep Tayyip Erdogan and Jean-Claude Juncker, European Commission president © Stoyan Nenov/Reuters

Almost two months after Recep Tayyip Erdogan’s re-election as president, Turkey is experiencing a serious financial crisis. This should be an opportunity for a fundamental reconsideration of Ankara’s relations with the EU.

The situation Turkey finds itself in today — with the lira trading sharply lower despite emergency measures announced by the country’s central bank — appears paradoxical. After all, in 2017, Turkish gross domestic product grew by 7.4 per cent, the fastest rate in the G20. However, the economy, which is highly dependent on the mood of international investors, is fragile.

Growth generates a large trade deficit and thus a significant need for external financing. Turkey is highly dependent on its exchange rate. The fall in the value of the lira will result in a rise in inflation, which is already at 15 per cent. This will have repercussions for wages, for companies’ profit margins and productive investments. Finally, the level of corporate debt, at a touch under 70 per cent of GDP, is among the highest in the OECD and suggests troubles ahead for Turkish companies.

The economic situation in Turkey has been exacerbated by a succession of statements from Mr Erdogan opposing a rise in interest rates. These remarks have cast doubt on the independence of the central bank, as has the appointment of the president’s son-in-law, Berat Albayrak, as treasury and finance minister. The latest round of US sanctions, levied after Ankara refused to release an American pastor held by the Turks on espionage charges, have added to the pressure on the lira. As a consequence, Turkey finds itself increasingly estranged from its traditional western allies and reduced to exploring an alliance of convenience with Russia.

The Turkish currency has become collateral damage in the trade war launched by US president Donald Trump against Canada, Japan, the EU, Mexico, South Korea, China and now Turkey.

Mr Trump, whose ostensible target was the bilateral trade deficit with Beijing, has erected trade barriers against his closest allies, with rising tariffs placed on European and Canadian steel and aluminium. The risk of contagion now threatens emerging markets as well as the eurozone, which is highly exposed in Turkey and is having to wrestle with the threat posed by the hardline fiscal policies of Giuseppe Conte’s government in Italy.

This current crisis also raises broader questions about the global supremacy of the US dollar, which remains the reserve currency for world trade. More than 62 per cent of the total reserves of central banks around the world are held in dollars.

For the time being, by comparison the euro remains a marginal currency, with implications for Europe’s economic independence. But the Turkish crisis should be an opportunity to reflect on the future of dollar supremacy and the rise of the euro — and on relations between Ankara and Brussels more broadly, given that the EU remains Turkey’s dominant trading partner, taking in close to half of the country’s exports as well as accounting for the lion’s share of foreign direct investment there.

It is time, therefore, to think about putting that relationship on a different footing by means of an EU-Turkey treaty that would have three components. On the diplomatic and security side, the reaffirmation of Turkey’s anchoring in the western camp and Nato; on the economy, a substantial increase in European aid and a guarantee of the independence of the Turkish central bank, and a commitment to curb inflation; and, finally, the further transposition of European standards into Turkish law.

This project does not require the sensitive question of the future of the EU accession talks between Brussels and Ankara to be settled. On the contrary, this is a propitious moment to propose a resetting of relations between Europe and Turkey, since Mr Erdogan is looking for allies. And, as French president Emmanuel Macron argued in his speech on the future of the EU in Lisbon in July, Turkey can and should play an important role in a “multi-speed Europe”.

At a time when Mr Trump treats Europe as a “foe” of the US, the bloc would do well to help Turkey to modernise further and to encourage the liberal and democratic values to which many Turks still subscribe, especially young people and those living in the country’s large cities.

The members of the Turkish economic and intellectual elite whom I met on a recent visit to Istanbul are waiting impatiently for encouragement from Europe. We must have the courage to give it to them.

The writer is professor of economics at Sciences Po, Paris

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The lira has had a tumultuous week as the markets punished an already struggling economy. Yet President Erdogan clings to his strategy, urging Turks to turn their gold into lira and boycott US goods. Here’s the best of this week’s opinion and analysis

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