Bernard Kennedy in Ankara -

Turkey has made little progress towards EU membership over the past two years, the EU Commission underlined on Tuesday, November 7 in its annual Progress Report. Financial markets were unmoved by the largely predictable report, news of which was overshadowed by top-level diplomacy over the possibility of a Turkish military incursion against Kurdish nationalist PKK fighters based in northern Iraq. Nevertheless, a more credible EU accession process may be required if momentum for improvements in the business environment is to be maintained.

Speaking in Brussels, EU Commissioner for Enlargement Ollie Rehn described the report as "fair but firm". He was willing to attribute delays in reforms in 2006 to the recent constitutional and political crisis, but didn't fail to stress the urgency of legislative change to enhance freedom of speech and religion.

The fact is that Turkey's two-year-old accession negotiations are proceeding at a snail's pace. Differences between Turkey and the EU over Cyprus have led the European Council to block accession talks in eight of the 35 negotiating areas, and to rule out the formal completion of the talks in all other areas. In practice, talks have commenced in only four areas (talks in two more areas are now expected to open within weeks).

Meanwhile, Ankara has failed to meet EU expectations of change not only in freedom of speech, but in fields such as cultural and minority rights and the political role of the military. The small print of the EU report points to a similar dearth of developments in key technical areas such as energy policy, social security, the labour market, taxation, the grey economy, enforcement of intellectual property rights and lingering trade disputes. "It was difficult to find things which could be mentioned as changes," an EU source confided.

Moments of doubt

Superficially, the EU wields extensive influence in Ankara. Its advice is sought on all key legislation, its consultants are active in a wide range of government departments, and non-government organisations thrive on its funds and projects. A detailed national plan envisages the completion by 2013 of all necessary legislative and other technical preparations for EU accession. Even so, the government has failed to take benchmark steps that Brussels has stipulated as preconditions if accession talks are to begin in many more areas.

Some of Turkey's wealthiest entrepreneurs are reportedly starting to doubt the sincerity of the ruling Justice and Development Party (AKP). The semi-Islamist AKP has continuously professed its commitment to the goal of EU accession, but may have less need for this discourse now that it has established itself firmly in power despite the opposition of secularists including the armed forces

More conventionally, Mustafa Bayburtlu, EU director at the Turkish Union of Chambers in the Turkish capital, describes the lack of any breakthrough on the benchmarks as a reflection of the uncertainty in Turkey over whether the EU is genuinely prepared to admit Turkey as a member. Days before the Progress Report was unveiled, Oguz Demiralp, head of the EU General Secretariat of the Turkish government, said that Turks were "distrustful rather than pessimistic." He cited the opposition of President Sarkozy of France to Turkey's membership ambitions and the resultant failure to open negotiations in the area of Economic and Monetary Union.

The long term

"Of course, completely abandoning the relationship with the EU would be a very bad signal," says Yelda Yucel, senior economist with Yapi Kredi Bank in Istanbul, summing up the attitude of the financial community. "But as long as we continue to have a distant relationship, the markets are satisfied... After all, everybody expects the EU accession process to take 10 years or more."

The EU's 2004 decision to begin accession talks with Turkey - albeit under a series of conditions and caveats - was widely seen as favouring economic stability and improving competitiveness through the accelerated adoption of EU norms. It was followed by a dramatic increase in foreign direct investment (FDI). According to the Turkish Central Bank, FDI more than tripled to $9.8bn in 2005 and more than doubled to $20.2bn in 2006. But Yucel believes that the confidence of foreign investors and financiers has been driven by stability and reform policies adopted in conjunction with the IMF; the EU "anchor" has been of secondary importance.

This may not always be the case. The IMF standby accord is set to give way to a looser form of monitoring as of early 2008. Meanwhile, national income growth is slowing and global financial conditions are uncertain. Privatisation will not last for ever. Sooner or later, Turkey's slow progress could damage financial and business confidence in the future of economic stability and pro-market reform, with negative implications for direct and financial investment.

So how long can Turkey-EU relations safely remain in limbo? "I don't think it will become a problem within the next two years," Yucel replies.

However, EU director at the Turkish Union of Chambers Bayburtlu says, "We need to have a date for EU membership ahead of the next EU budget cycle in 2014-2020."

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