Turkey’s EU uncertainty presents risk to business

Originally published on Bosphorus Consulting on 15 April 2014

Recently, a German politician of Turkish descent, Aydan Özoğuz, made a statement about Turkey’s unsuitableness as a member of the EU, saying that the country is distancing itself from Europe (See also, Reuters “Erdogan victory puts icy Turkey-EU relations in deep freeze”, 31 March 2014). Turkey’s image is not faring well, demonstrated by Turkey’s EU Minister, Mevlüt Çavuşoğlu’s, declaration that Turkey will seek to fix its image. However, at the same time Ankara has demonstrated a growing lack of interest in the process of accession, with a senior advisor to the Prime Minister, Yiğit Bulut, recently claiming Turkey does not need the EU.
While Turkey’s trade with the EU has profited from the existing customs union, ultimately, many commentators now feel that not only will Turkey now never become a full member, but that it could never have anyway (The TelegraphTurkey will probably never be EU Member”, 21 September 2013). However, despite this, Turkey has arguably profited simply from engaging in the EU accession process. For one thing, having the EU accession to fulfil appears to have provided Turkey with a guiding structure for reforms which have benefitted the country considerably (Social Europe JournalWhy Turkey would still benefit from EU accession”, 29 October 2012). With respect to investment, the emphasis on transparency and the rule of law served to create a more reassuring environment for foreign capital. If Turkey’s growth is to continue, investors must be assured that an environment of enduring political stability will be maintained (CFA Institute “The Turkish economy has survived crises before, Elections are key to investor confidence”, 9 April 2014). In addition to this, the accession process until now has helped to underline Turkey’s alignment with the west, making the country more attractive to longer-term, less speculative investors (Global Risk Insights “Turkish economy depends on political stability”, 9 November 2013).

These positive narratives for the Turkish market are now under threat. Turkey seems to have lost some of the ground made in terms of its commitment to transparency, which has presented itself alongside an increasingly mixed approach towards the EU from Ankara, with suggestions that Turkey may be starting to widen its outlook in terms of its alignment (The EconomistThe battle for Turkey’s future”, 29 March 2014). Ankara can greatly benefit, both geo-strategically and with regard to encouraging investment, by maintaining good relations with actors from various alignments, but this will be less helpful if it is at the expense of its relations with the EU. The domestic upheaval of the past ten months resulted in an increase in rhetoric depicting Turkey as an authoritarian, oppressive state, an increase which most probably played a large part in the lira’s subsequent depreciation (see our earlier Bosphorus Consulting blog post). Moody’s justified its recent downgrade of Turkey’s outlook from “stable” to “negative” by noting the increased susceptibility to what Moody’s refers to as “event risks”. This suggests that a move away from the EU represents a risk to Turkish businesses with respect to their ability to engage with international customers and investment. As such, the onus appears to be increasingly on Turkey businesses to demonstrate to international investors the many valuable opportunities that many of the country’s ventures still represent.

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