The British vote to leave the EU raises some hard and complicated questions for Turkey’s EU relations and its bid to join the bloc. Even though it is still too early to make a sound assessment of Brexit, the UK’s divorce from the bloc will definitely have big political and economic implications for Turkey.
It is difficult to predict how Brexit will unfold and it is equally difficult to say what it will mean for Turkey’s EU membership prospects. Given the rise of anti-migrant, anti-Islam, far-right parties in Europe, EU leaders, who are already criticised for being far too accommodating of Turkish President Recep Tayyip Erdogan, could come under further pressure to put accession talks with Turkey on ice, at least for some time.
But some politicians in the Turkish capital see opportunities that could arise from the uncertainties triggered by the departure of the UK, since they think the Union will now have to reconsider its policies to become more inclusive and may reinvent itself in the face of the biggest crisis it has faced since the foundation of the bloc. Turkey, this more optimistic camp believes, holds all the cards in the migrant and security issues, so the EU has no other option but to seek closer cooperation with Ankara.
A friend lost
On the negative side, Brexit could delay Turkey’s accession process, as Brussels will be busy figuring out how to deal with the departure of the UK. With the UK heading out the bloc, Turkey has lost one of its closest allies and a supporter of its EU accession, putting the prospects for Turkish membership at greater risk. This will be especially true if the anti-EU sentiment grows stronger in other EU member states after Brexit. The EU could even completely halt the enlargement process altogether.
The UK’s departure also comes at a time when relations between the bloc and Turkey are deeply strained over the implementation of a key migrant deal.
Turkey, a Muslim country with a population of 78mn, has been a candidate for EU membership since 1999. Formal accession negotiations started in 2005. Accession talks, however, have stalled over the past couple of years as the pace of reforms in Turkey has slowed. EU member states raise serious questions about Turkey’s human rights record, while the other stumbling block is Turkey’s uneasy relations with the divided island of Cyprus. Ankara complains it has waited so long at the EU’s doorstep that Brussels is not being sincere and honest towards Turkey.
According to Erdogan, the problem is not Turkey but the EU itself. Erdogan believes – and his view is shared by many Turks – that the reason the EU is not admitting Turkey is because of Islamophobia and the conditions put forward by Brussels are just excuses for not admitting this large Muslim nation. Take the migrant deal, says Erdogan. As part of the deal reached with the EU in March, Ankara agreed to take back all migrants who had illegally entered Greece. In return, the EU promised fast-track membership talks, an easing of visa rules for Turkish citizens, and €6bn pledged in financial aid until 2018.
But it looks increasingly unlikely that Turkey and Brussels will reach an agreement on visa-free travel before the July 1 deadline, as Ankara is refusing to change its anti-terror laws, a condition for the bloc to ease visa requirements for Turks. Erdogan and his government argue that the country needs to keep all this laws in place in order to effectively counter the threats posed by the Kurdistan Workers’ Party (PKK) and Islamic State. The issue has at an impasse and it is difficult to see how the sides can find a compromise.
Nobody had predicted a smooth and easy accession process for Turkey, but the situation has gotten more complicated over the past years due to the EU’s own internal problems and the changing political landscape in Turkey: Erdogan has become a much more authoritarian and anti-EU figure.
Few doubt that Brexit will dominate Europe’s agenda in the short term and Turkey’s accession process will probably have to be pushed down the list of priorities. “Seeing the manner in which Turkey’s accession was used as a fear-mongering device by the ‘Leave’ campaign in the UK, the bloc could also explicitly press the brakes on the negotiations, as they seek to contain the nationalist and Euro-phobic impulses that Brexit is likely to awaken in the rest of the EU”, Ege Seckin of the consultancy IHS in London tells bne IntelliNews.
Turkey’s membership was one of the key issues debated during the UK’s EU referendum campaign. The “Leave” camp in the UK used Turkey’s EU bid to underline the dangers of remaining within the bloc, riding on public fear about the threat that Islamists pose to the country and Europe. To ease UK voters’ concerns, British Prime Minister David Cameron said Turkey would not be able join the EU until the year 3,000. This is exactly the kind of attitude that angers politicians in Ankara. Erdogan did not waste any time in mocking Cameron: “What happened now? You [Cameron] could not stand [in office] for even three days after the vote.”
Erdogan thinks Brexit signals the beginning of a new era for the bloc, and he warned that the EU could face further breakup if it does not reconsider its policies, including those to do with migrants. Echoing Erdogan’s views, his prime minister, Binali Yildirim, said the EU should carefully read into the UK’s decision to leave the bloc and reconsider its vision of the future. The statements by Erdogan and Yildirim suggest that Ankara expects an overhaul of the EU’s entire mindset.
Atilla Yesilada, Turkey analyst at GlobalSource Partners, sees a difficult period ahead for Turkey-EU relations. According to Yesilada, further “leave” referenda in other EU counties could focus the minds of investors on political risks, whereby they would more pay more attention to Turkey’s troubled accession deal in general and the upcoming battle over Erdogan’s desired executive presidency in specific.
In the face of pressure from the EU to change anti-terror laws, Erdogan, who has repeatedly threatened to tear up the migrant deal, has said that Turkey could hold its own UK-style referendum on the country’s EU accession talks. “Turks are not eager for visa travel, but it is you [the EU] who is after Turkey, because you fear about what would happen if Syrian refugees arrive at your borders,” he said.
His comments were a response to European Commission President Jean-Claude Juncker, who said in a recent interview that if Turkey’s president seriously tries to break the agreement, then it will be his job to tell the Turks why they cannot not enjoy visa-free travel to Europe. “We can easily explain all this to our people if they [the EU] continue to press hard on the issues such as the anti-terror law,” Erdogan scolded.
Turkey hosts nearly 3mn refugees from Syria. Reportedly, at a summit with EU leaders last November Erdogan threatened to flood Europe with refugees if Turkey’s demands were not met. “You are not keeping your promises. You don’t want to admit Turkey to the EU because the majority of our population is Muslim,” Erdogan said just last week.
But Erdogan could find it difficult to sell the idea of abandoning Turkey’s EU aspirations. Recent polls have shown that public support for the country’s EU membership increased this year even though the majority of the population do not think the bloc will ever accept Turkey’s accession. A survey carried out by the Economic Development Foundation (IKV) in April found that support for EU membership has increased to 75.5% from 61.8% last year. According to another survey by Istanbul-based Kadir Has University, support for membership jumped to 61.8% this year from 42.4% in 2015. But both surveys also found that most Turks do not believe Turkey will ever be admitted to the EU. As many as 73% of the surveyed by IKV said the block will never accept Turkey, while according to Kadir Has University's poll 66.7% think Turkey will never become a member, up from 47.6% last year.
Erdogan knows full well that Europe desperately needs Turkey’s help to stop the influx of refugees and he probably thinks Europe’s desperation gives him some leverage in the visa and accession talks. But he walks a very fine line here. If Turkey uses the refugee crisis to blackmail Europe to gain more concessions, this tactic could backfire at a time when anti-Muslim, anti-migrant movements seem to have gained momentum across Europe. Turkey’s EU accession will become a hate figure in Europe over the coming months as anti-migrant parties exploit the issue in their campaigns.
Despite all the uncertainties surrounding the Brexit saga, Erdogan still needed to reiterate Turkey’s EU aspirations: “Turkey will naturally take its place within the EU if the bloc sincerely questions itself and does what’s required.” His remarks on June 24 suggest that he is not willing to cut ties with the EU unilaterally in the near future.
“In the medium to long term, the implication for Turkey will depend on the nature of the relationship the UK ends up negotiating with the EU, which could provide an alternative example for Turkey’s currently deadlocked accession process. This is one potential positive outcome for Turkey,” Seckin argues.
As a pragmatic politician, Erdogan could choose to wait to see how the EU deals with the UK’s departure and the impact of Brexit on the global economy before he acts. Escalating tensions with Europe, his country’s largest export market, will mean more troubles for Turkey’s economy and he knows that.
Realizing that Brexit will hurt Europe’s economy, Erdogan has made some unexpected but rational moves: He signed an agreement to repair ties with Israel and offered his apologies to Russia over the downing of a Russian plane in November last year.
Erdogan saw that tension with Russia was taking its toll on Turkey’s economy and is trying to shore up the country’s international ties after the UK vote. “This might be a Turkish reaction to Brexit, and the assumption that the EU, and the EU accession anchor will now weaken, and that Turkey needs to make up with its neighbours,” Tim Ash of Nomura International posits.
Implications for Turkish economy
Brexit will inevitably have big implications for Turkey’s $720bn slowing economy. The lira plunged and Turkish stocks fell in line with other emerging market currencies immediately after the result of the UK referendum.
The local currency lost 2.2% of its value against the dollar between June 23 and June 27. Stocks have fallen 3.1% over the same period. Hardest hit are the companies for which the UK is an important market. Shares in carmakers Ford Otosan and Tofas have dropped 9.8% and 9.1% since June 24, while household appliances producers Arcelik and Vestel Elektronik saw their shares plunge 6.7% and 1.5%, respectively. Shares in Vestel Beyaz Esya are also down 5.2%. Ford and Tofas generate around 25% and 6% of their sales revenues from the UK, according to local brokerage house Is Invest. For Arcelik and Vestel Elektronik, these figures are 10% and 12% respectively.
According to GlobalSource’s Yesilada, Brexit will affect Turkey through the channels of trade/investment and global financial flows. The UK is Turkey’s second largest export market after Germany. Bilateral trade between the two counties stood at around $16bn last year with Turkey’s exports to the UK amounting to $10.5bn and imports at $5.5bn. Over 2,500 UK companies are currently operating in Turkey including BP, Shell, Vodafone, Unilever, BAE, Aviva and Diageo, according to the UK’s Foreign and Commonwealth Office. Well-known retail chains, including Harvey Nichols, M&S, Kingfisher and Laura Ashley also have significant operations in the country.
The magnitude of the effects of the Brexit vote on the Turkish economy will depend on how the UK manages the exit from the EU and whether it will send the economy into recession, as many fear. If Britons get poorer as some economists predict as a result of Brexit, this could also hurt Turkey through the tourism channel: UK citizens visiting Turkey accounted for some 7% of all foreign tourists last year. According to Nomura’s baseline scenario of a 2% peak-to-trough fall in UK output, Turkey’s growth may decline by around 0.1pp.
“I think Brexit and the ensuing political uncertainty in the EU would damage economic growth, as well as depressing the value of the pound and euro, reducing Turkey’s exports,” Yesilada says.
With the current account deficit already expected to widen in the second half of 2016, this is potentially bad news for the lira, he argues. Yesilada also notes that Turkey is already receiving little in the way of foreign direct investment (FDI), most of which comes from the EU, and he warned that FDI might halt altogether until the UK and the EU sort out their internal problems. Net FDI inflows into the country declined by 54% y/y to $1.7bn in the first four months of the year.
On the financial flows front, Yesilada also sees more trouble ahead. “It is conceivable that Brexit and the spectre of far-right rising in EU could deter financial flows into EM, or force banks to reduce credit to EM for a prolonged period, which would drive up credit cost in Turkey”. Growth would slow, while in already damaged industries like tourism, mining and metals and construction default rates could go up, according to Yesilada.
“One may conjure up a scenario whereby Fed delays rate hikes to 2018, which could accelerate financial flows into EM, but this would only be possible in a world where US is suffering from a recession, which is not good for global financial markets”, he said. “Therefore, we are largely talking about negative consequences here.”
Central Bank moves
As the world markets brace for more volatility, investors will keep a close eye on Turkey’s central bank, which has been under pressure from politicians to cut its interest rates to stimulate economic growth.
“This isn’t starting as an emerging market problem, but it may evolve into one and if it does, Turkey rarely escapes the wrath of markets,” Michael Harris of Renaissance Capital tells bneIntelliNews. “Hence the importance of the central bank having the toolkit to deal with currency weakness should it materialize in size.”
in June Turkey’s central bank delivered another rate cut in a widely expected move. It slashed the overnight lending rate by 50bp to 9%, but it kept the main policy rate (one-week repo rate) unchanged for the 16th month in row at 7.5%. The overnight borrowing rate was also left on hold at 7.25%.
Harris thinks that as politically rate hikes are not palatable, the central bank is now much more reliant on reactionary policy rather than the preventive policy.
Analysts at Nomura expects the central bank to continue cutting rates, but more cautiously. “Turkey, while technically having room for a fiscal loosening (such low debt to GDP), would be ill-advised to take such a course of action in our view,” the analysts said, adding that given the transition to an executive presidency and a new government, investors may question motives.
The next meeting, scheduled for July 19, will be an important test of how dovish the new Monetary Policy Committee really is, according to Nomura.