Europe’s big eggs in Turkey’s economic basket(Al-Monitor, October 6, 2018)

Turkey’s government has recently launched efforts to mend fences with the West. This comes after a period of unprecedented rapprochement with Russia and Iran, marked also by accusations that the United States was waging an “economic war” on Turkey. No doubt, this sudden change of heart has to do with the economic crisis bruising Turkey. Despite lingering political tensions, Germany and other EU countries have been open to Ankara’s courtship. This also has to do with economic concerns, as Europeans have a good deal of eggs in Turkey’s basket.

The messages that President Recep Tayyip Erdogan issued during his trip to New York and his ensuing visit to Berlin in late September were seen as confirmation that Ankara is readjusting its course, though few could say whether this will be a lasting shift.

Addressing a Turkish-US business group in New York, Erdogan expressed confidencethat “our strategic partnership [with the United States], which has gone through difficulties so many times, will overcome this turbulent period.” His conciliatory tone strengthened expectations that Turkey might soon free American pastor Andrew Brunson, whose controversial detention has led to unprecedented US sanctions against a NATO ally.

On ties with Germany, Erdogan said he wanted “to take the relationship back to its old warm period.” Only a year ago he had accused the German authorities of “Nazi practices” after they barred members of Erdogan’s Justice and Development (AKP) from holding political rallies with Turkish migrants in Germany.

Turkey’s economic crisis is arguably the most important driver in Erdogan’s change of heart. The economic shocks in August and September seem to have ultimately convinced him that clashing with the West, which dominates the global financial system, does nothing to help the Turkish economy weather the turmoil.

Turkey’s consumer inflation surged to nearly 25% in September from a year earlier, while producer inflation shot up to more than 46%. The staggering increase in prices is coupled with contractions in the industry and the services sector and rising unemployment. Amid such an extensive and complex crisis — called stagflation in economic literature — the urgency for external funds is growing by the day.

Foreign exchange prices, meanwhile, remain high despite hefty rate hikes to prop up the embattled Turkish lira and the announcement of a new economic program last month. Ankara’s measures have yet to inject the desired confidence in foreign investors.

The external loans and foreign direct investments that Turkey receives come overwhelmingly from the West, which, of course, is the primary factor behind Ankara’s fence-mending drive.

According to central bank data, foreign assets in Turkey amounted to $633 billion in July, including $457 billion in debt, a third of which was in euros. German, British, Swiss, Dutch and Luxembourgian banks account for half of the creditors.

Direct foreign investments, meanwhile, are worth $142 billion, out of which $138 billion — a staggering 97% — belong to European companies. Dutch companies top the list with $41 billion. German and British investments amount to $18.2 billion and $8 billion respectively, with Spain, Italy and Luxembourg standing out as other prominent investors.

In sum, Europe is the source of almost all foreign direct investments and half of external loans that Turkey benefits from.

At the same time, Turkey is an important trade partner and tourist destination for Europeans.

In 2017, about 47% of Turkey’s $158 billion of exports went to EU countries. The share reaches nearly 54%, including the other European nations. Turkish exports to Germany amounted to $14.1 billion, or nearly 9% of total exports, last year. Germany’s share increased to more than 10% in the first eight months of 2018.

Turkey is also an important buyer of German goods. In 2017, imports from Germany were worth $21.3 billion, or 9% of Turkey’s total imports of $234 billion. The EU’s overall share, meanwhile, amounted to nearly 37%. Imports from Italy were worth $11.3 billion and imports from France $8 billion.

Turkey remains a popular destination for European tourists despite a decline in the past several years. In the first eight months of the year, about 9 million out of 27 million foreign visitors were from European countries (OECD members), including 3 million from Germany. After Russians, Germans remain the second-largest tourist group for Turkey.

Turkey’s integration with the global economy has notably accelerated in the past two decades. Economic links with the EU have particularly deepened, with Turkey becoming home to important EU investments. Hence, the economic turbulence in Turkey is a source of anxiety for many Europeans as well, be they investors, creditors or traders. The serious economic risks for the EU are why German Chancellor Angela Merkel welcomed — though cautiously — Erdogan’s fence-mending moves.

German leaders, however, made sure to remind Erdogan that turning a new page depends also on political conditions. Germany — and the EU in general — want to see concrete steps on remedying violations of human rights and the rule of law in Turkey. Berlin, so it seems, will maintain its demand for democratic moves, not only because it is under pressure at home to be harsher on Erdogan, but also because restoring trust in the rule of law in Turkey is crucial for foreign investors as well. In the crackdown after the 2016 coup attempt, Ankara seized hundreds of companies and, at one point, even sought to implicate German firms operating in the country.

Erdogan, for his part, refers frequently to his hope for fresh external funds, both as direct investment and loans. He looks for European help also on Syria, where he faces a hot-potato mission involving the difficult task of disabling radical groups in Idlib.

As Turkey’s economic bottleneck gets tighter, the anger of crisis-hit voters is a growing concern for the AKP ahead of local elections in March. Scrambling to alleviate the crisis by then, Ankara pins hope also on German and EU support.