Turkey’s economy stands to suffer from euro’s downturn Read more: https://www.al-monitor.com/originals/2022/07/turkeys-economy-stands-suffer-euros-downturn(Al Monitor, July 15, 2022)

The euro’s slide to parity with the dollar is producing fresh strains for Turkey’s foreign trade, tourism and external debt liabilities, threatening to further fan the country’s galloping inflation.

The Turkish economy, which had long benefited from a euro stronger than the dollar, is in vulnerable shape now that the tide is turning. Its fragilities owe mainly to the dramatic slump of the Turkish lira amid Ankara’s controversial economic policies, marked by obstinacy in keeping interest rates low despite a dizzying surge in inflation.

The rise of the dollar versus the euro means extra strains for countries like Turkey whose foreign currency earnings are mostly in euros but have most of their foreign currency spending and liabilities in dollars. To shield their currencies against the strengthening appeal of the dollar, some countries have raised interest rates, but Turkey has effectively removed that instrument from its toolbox, risking heavy blows from the euro’s downturn.

The dollar has been buoyed by the US Federal Reserve raising interest rates and tightening monetary policy in the face of inflation soaring under the global impact of Russia’s invasion of Ukraine and the COVID-19 pandemic. Consumer inflation has hit a higher-than-expected 9.1% in the United States and an average of 9.6% in the Organization for Economic Cooperation and Development. In the 19-member eurozone, it has surged to an annual of 8.6% and is expected to rise further, with European countries taking some of the heaviest blows from the war in Ukraine, including risks to crucial energy supplies.

The European Central Bank, however, has lagged behind others in hiking rates, contributing to the weakening of the euro against the dollar’s growing appeal to global investors. The bank is under pressure to balance the interests of 19 countries that differ in economic strength, which makes quick and firm action more difficult. The tardier the bank, the more the euro is expected to slide versus the dollar.

For Turkey, the euro’s slip to parity with the greenback and the prospect of it dropping even further is bad news in terms of foreign trade in the first place. While Turkish exports invoiced in euros and dollars are almost equal — 45% and 48%, respectively — the country pays in euros for only 28% of its imports and in dollars for 71%. Other currencies represent the remaining share in Turkey’s foreign trade, and they too have lost ground against the dollar. To preserve euro-paying markets, Turkish exporters might be forced into dumping, adding to what some economists call the “immiserizing” impact of cheap exports.