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Wednesday, July 25, 2007

Turkey and the EU

From the Gulf Economist:

Is EU membership in Turkey's best interest?

As images of massive Turkish pro-secularism protests aired around the globe, a hitherto less publicized, parallel struggle in Turkey is increasing in intensity. A struggle which is perhaps less overt, but nonetheless equally significant, perhaps even more. What’s at stake is nothing short of the Turkish economic miracle, a miracle which has transformed Turkey from an unattractive investment destination with uncontrolled inflation, to an investor-friendly, politically stable and competitive economy.

At this point, cracks are becoming increasingly visible in Turkey’s hitherto broadly supported application for the coveted EU membership. Turkey is torn apart by two opposite forces, those who desperately crave for EU membership and those who object in the strongest sense of the word. Traditionally, the former dominated the public discourse and the latter was little more than a vocal minority. Today, the scales have tipped in the opposite direction as a 2006 poll in Milliyet newspaper showed that only 1/3 of the Turks are still supportive of their nation’s bid for EU membership. This dramatic drop is explainable by four prime reasons:

# Too many compromises at the expense of national interest. The most prominent of these compromises being the status of EU member Cyprus and the alleged Armenian genocide.
# Too many cultural tradeoffs. Europe may fear Turk’s inherent Muslim culture, by analogy Turks fear a spill-over of certain elements of European culture. Among others, there is growing opposition to Christian missionaries by Turkish nationalists. This opposition is largely peaceful and not much different from Western conservatives’ opposition to Islam, but has the potential to erupt on a micro-level. Last April’s widely publicized murder of several Muslim converts to Christianity proved the exact potential of this undercurrent. In Turkey’s defence, the attack was widely condemned.
# Rise of nationalism in the EU. With all the anti-Turkish rhetoric in European media and public discourse (a recent Dutch poll showed that roughly 70% of the Dutch oppose Turkish membership of the EU), an increasing number of Turks are coming to the realization that they will be uninvited guests at a hostile party.
# Diminishing sovereignty. It will take years before Brussels will wield the needed power to outweigh national governments on major issues, but the day will come. Even though Turkey, as the most populous nation, would form the biggest bloc in the European Parliament, the question is whether the Turks are ready to delegate power to Bulgarians, Romanians, French, Greeks, Cypriotes and Brits over issues affecting them. Careful readers may notice that the reference to these specific EU members is not unintentional.

Europe in its turn, is equally divided on the issue. The economic significance of Turkey is rarely disputed. Even those who are vehemently opposed to Turkey’s inclusion, admit its economic significance as a major market. Also, there is wide consensus on the merits of its ‘bridge function’ between the Islamic and Western world, a ‘bridge function’ which is far from a luxury in the so-called ‘global war on terror.’ But, many European governments fear that the inclusion of 70 million –mostly Muslim- Turks would further strain the overheated social welfare system and would further complicate Europe’s integration of its 20 million Muslims.

In the midst of these tensions, the question is: Who would gain the most in the case of EU membership, Turkey or the EU? We spoke to Dr. Ahmet Arinc, a Brussels-based economist of Turkish descent. As part of a new generation of Turkish intelligentsia, he remarked: “The problem we are facing is that we are so obsessed by Europe, so blinded by the imaginary pot of gold, that we forget EU’s ocean of rules, the burden of implementing the costly ‘acquis communautaire,’* the high taxes and sluggish welfare states. Worst of all, we forget that Asia is where the action has been going on for the last decade.” In defence of Europe, the sluggishness has been a target for reform of virtually all European cabinets for the past years. Nonetheless Dr. Arinc is absolutely right about Asia as a future economic powerhouse and European overregulation.

Disregarding the EU, what are Turkey’s chances in Asia?

Turkey’s potential as the centre of all ‘Turkic’ nations increased the day the Soviet Union imploded. Many former Soviet states (many of which are currently awash with oil and gas dollars since the 2003 price hike) have close cultural, ethnical and linguistic ties with either Turkey or Iran and both try to maximize the potential of this potentially lucrative opportunity. In the end, the Caspian Sea is being hinted as a new economic powerhouse and scale does matter in international commerce and politics, the ‘Anglo-Saxon axis’ has proven this. The bigger your (ethnic, linguistic, religious) bloc, the bigger your influence becomes.

Perils of EU membership.

Turkey’s low wages and lax –relative to EU- regulation might be jeopardized in the case of EU membership, destroying its two most valuable investor attractions: cost benefits and flexibility. One of the worst hit sectors will probably be Turkey’s surging tourist sector, of which the success is -to a large extent- explainable by low prices with which traditional European holiday destinations such as Spain and Greece find it hard to compete. It should be noted that the latter two show no signs of giving up and try to carve out new markets. Dr. Arinc stated that: ”We really aren’t sure that the merits of EU membership will outweigh the huge costs of implementing the acquis communutaire. There is serious debate on this issue. It’s a gamble and I don’t know if we should take this gamble when there are so many sure bets out there.”

Poland perfectly illustrates the perils of EU membership. Poland has witnessed a period of continuous influx of manufacturing jobs, primarily due to its abundance of manpower and its –relatively- low wages. This trend is still visible and upward oriented, but shows signs of cooling of. Poland’s relatively lax regulation is slowly being replaced by elaborate and complex EU rules and regulations, diminishing its competitive edge in many ways. One also has to be aware of the spill-over in ‘cost of living’ when entering a relatively rich economic/monetary union. The nineties attracted a lot of investment to Poland, this caused the GDP and wages to increase. Hans Blatter, a Hamburg-based corporate analyst told us in a phone interview: ”Today’s Polish workers are becoming ‘high maintenance,’ they are demanding higher wages and benefits. In a sense, they are ‘Westernizing’ and this scares some of the investors away. And then there are all these new rules sprouting from all corners. Let’s be frank about it, manufacturers, especially those in labour-intensive sectors, hate rules. That’s why so many businesses moved to China when it opened up, businesses can pretty much do whatever they want over there….. We are seeing a definite trend in investment flowing to Ukraine which we didn’t see before. I think Ukraine is going to take from Poland what Poland took from Germany.”

Mr. Blatter brings up interesting points that match our own analysis and observations. During the course of the past two months, we have surveyed a total of 87 Dutch companies and asked them to state their top source of agitation with the Dutch system.

31%-High wages
23%-High Taxes
2%-Lack of qualified personnel

We did the same in Italy and the results were similar.

26%-High wages
24%-High Taxes
12%-Lack of qualified personnel

The results are revealing. Overregulation and high wages form the two top sources of agitation for Italian and Dutch entrepreneurs. So far, little empirical evidence shows a European-wide dedication at curbing the immense cannon of rules and regulations. Many European entrepreneurs, frustrated by high wages and burdensome rules, eventually vote with their feet and move their companies to nations such as Turkey, where wages are still low and EU rules and regulations are not yet in sight. And curbing this capital flight has been a priority for many a West European government ever since the fall of communism. Part of the strategy is inclusion of competitors. The theory, which we call 'swallowing competition,' has proven to be quite successful at a micro-level. The European Union is now implementing it at a macro-level. By including new members in the EU:

-New markets can be carved out.
-New (cheaper) human resources can be tapped.
-Existing members can impose their rules and regulations on the new members. Passively, the existing members’ living standards will spill over to the newly admitted nations. This process of imposing rules and ‘spill-over effects’ will eventually curb uncontrolled ‘capital flight’ from the richer nations.

The downside of courting Europe.

Courting the EU also included a less prominent role for the powerful Turkish military, the same military that functions as guardian of Mustafa Kamal Ataturk’s secular Turkey. The most drastic effects however, materialized in the nation’s eastern mountainous area, an area dominated by so-called ‘Mountain Turks.’ The ‘Mountain Turks’ are better known in the rest of the world as Kurds. Buoyed by their prosperous and semi-independent brothers in Iraq, some Kurdish factions have blown new life into the waning armed struggle which has claimed some 30.000 lives in recent years. It should be noted that this armed conflict seems to have less legitimacy among average Kurds than it did in the past. There exists a dual explanation for this.

-After the last wave of violence, Ankara refocused on the area and created better schooling, better infrastructure and ample jobs. Ankara was helped by the economic upswing of recent years.
-The scale of the sectarian violence in Iraq has cooled of many Kurdish aspirations of armed struggle and created a more pragmatic approach.

The upside of courting Europe.

Despite all this, the very process of courting Europe by itself, has had a tremendous positive effect on Turkey’s economy. A positive correlation is definitely visible, whether this correlation is a hint to causality is probable, yet hard to prove. In order to appeal to European governments, Turkey pushed through with a series of rigorous economical reforms to further liberalize its economy, and with liberalization came rejuvenation. Also, the prospect of future membership forced the Turkish central bank to bring the uncontrolled inflation back to manageable and acceptable levels.

Inflation: GDP deflator (source: World Bank)

2001: 55%
2002: 44%
2003: 23%
2004: 10%
2005: 5%

In conclusion, our own view is that in the midst of remerging European nationalism and Turkish rationalization, the chances of a Turkish member of the European Parliament have not been so negligible in the past two decades. From a political and economic point of view, this might actually be in Turkey’s best interest.

-M. Tahmasebi & S. Van Zanten

*Aquis Communutaire refers to the vast (roughly 85000 pages) European cannon of rules and regulations thus far. All aspiring EU members must implement these rules and regulations in the case of membership.

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