This was the title of an action movie, where a small boat is caught in high sea between two different storms, at the point of juncture in between them. This resemblance summarizes perfectly the situation of the financial turmoil Turkey is in unfortunately.
Some structural assessments are needed: Gradually since 2013, the period of plentiful and cheap international finance has ended. After the 2009 crisis, main central banks inundated the markets with money, trying to avoid a worldwide recession. For the last four years, starting from the U.S. Federal Reserve, a tightening of monetary mass was heralded. This meant much less availability of cheap financing for emerging markets.
Secondly, the structure of the Turkish industry, relying chiefly on imports to be capable of producing goods to export, did not change over time. It remains dependent on imported semi-finished products in order to remain competitive. It is an economy running a very sizable current account deficit needing constant financing by foreign investors.
Thirdly, the Turkish economy is based on convertibility, there are exchange buffets almost everywhere, and it is not possible to talk about a limitation to capital movements in such an open and liberal structure. The economy is also almost totally integrated to the European single market. Therefore, the structural reforms long sought by a vast majority of analysts will definitely be inspired again by single market regulations. In that sense, a good web of financial and political relations with the EU institutions and EU countries remains necessary.
Finally yet importantly, the Turkish economy is overheated. Doubling the efforts to establish an even increasing number of projects, to devise a Keynesian way out of current turmoil may not find the necessary financing on international markets. The French experience of 1981 is eloquent in this domain, to show the inefficiency of Keynesian policies in a hostile financial environment.
Both the president and the minister in charge of the economy have detailed their views and action plans to get Turkey and its currency out from this terrible downward spiral. The international markets did not really react positively, for two reasons: The first one is that nobody believes a Keynesian policy can take Turkey out of the storm, but the second issue is more important and more dangerous. It is called Donald Trump.
The international economic structure we live in is a pure U.S. system, which was first offered by Woodrow Wilson in 1919, but rejected. It has been imposed upon the "Western world" by Franklin Delano Roosevelt after 1944, and has worked more or less satisfactorily since. At least we did not have a worldwide conflict, nor a deadly crisis like in 1929.
Now Donald Trump, who acts very much like an elephant in a china store, has decided unilaterally that he can dismiss any rules that have the misfortune of displeasing him at a given moment. There was already an accumulation of conflicting interests between Turkey and the U.S., regarding the policies implemented in the region. This is not new, since 1963, we have had very tense periods of misunderstanding between the two major allies of NATO. At a certain point, the U.S. has even imposed an arms embargo over Turkey.
All these problems could have been solved through diplomacy and sound bilateral relations. With Trump as president, this has totally changed, very secret negotiation problems can be made public through a tweet or through a tempestuous declaration to the press. The case of pastor Brunson, which has become the symbol of the accumulation of conflictual views, is a very good example. A Christian missionary has been arrested for having ties with the Gülenist Terror Group (FETÖ) and the PKK terrorist group. However, there was a very visible flexibility on the part of Turkish jurisdiction, which allowed the pastor to be freed from jail and remain under house arrest. This means, in the usual diplomatic ways, that the person will be free to leave the country in a short while. This may not look moral, nor legal, but this is how the conflict situations between allied countries are solved. This was not to the taste of President Trump and Vice President Pence who have opted for "gunboat diplomacy" rhetoric. To add insult to injury, Donald Trump has increased twofold the custom duties for Turkish steel and aluminum.
Such a slap on the face has had immense negative reaction on financial markets. The combination of both structural economic shortcomings and foreign policy turmoil have created the perfect storm. It is essential not to panic in such situations. It is no less essential to be in good terms with international organizations to support economies in difficulty. The Turkish Central Bank has already taken some solid measures, if they are followed by important supporting messages and declarations by the European Central Bank and alike, we might see the end of this terrible volatility soon.
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