EU business and Turkish accession By Katinka Barysch and Rainer Hermann Many EU politicians and their voters are unsure about the merits of Turkish accession. Europe’s entrepreneurs are not. They are showing confidence by investing billions into the fast-growing Turkish economy, partly because they expect that EU accession will continue to change the country for the better. Given the growing stakes that EU business has in the Turkish economy, it is surprising that so few businesspeople are prepared to speak out in favour of Turkish membership of the EU. F o reign companies play a big role in Turkey’s current economic success. Since the last currency crisis in 2001, Turkey’s economy has grown by an average of 7 per cent a year. Annual foreign direct investment (FDI) inflows were a paltry $1 billion or less until 2004. They ballooned to $9 billion in 2005 and $20 billion in 2006 – more than India received that year. One quarter of Turkey’s top 500 companies now have fore i g n investors. Until recently, it was mainly big multinationals that ventured into Turkey’s unstable and diff i c u l t market. Now they are being followed by a growing number of small and medium-sized enterprises. And as g rowth spreads from big cities such as Istanbul, Ankara and Izmir into the regions, foreign companies follow. EU countries account for 60 per cent of the total stock of FDI in Turkey. Of the 15,000 foreign companies that have invested there, the vast majority (8,300) come from EU countries. Germany has traditionally been Turkey’s biggest foreign investor, while the Netherlands, the UK, France and Italy also have substantial investments there.
A crisis-prone past Turkey’s current boom is all the more remarkable given its long history of economic underperf o rmance and instability. Periods of mediocre growth were interspersed with economic crises. After the most recent one, in 2001, the lira plummeted by 40 per cent, inflation shot up to 70 per cent and the budget deficit exceeded 15 per cent of GDP. From a West European perspective, the country looked poor, peripheral and volatile. Turkey’s economy was the biggest obstacle to its EU accession aspirations. West Europeans feared not only a massive influx of unskilled Turks seeking to escape poverty and unemployment at home. They also thought that Turkey’s vast, inefficient farm sector would overwhelm the EU’s limited budget. In short, Turkey’s economy looked like a threat or burden, not an opportunity. The post-2001 recovery has changed this perception, at least in the eyes of the West European business community. The International Monetary Fund (IMF) has helped Turkey tremendously in its stabilisation eff o rts. After the 2001 crisis, it lent Turkey $15 billion, while insisting on a package of far- reaching structural re f o rms. Inflation is now in single digits and the budget deficit is down to 3 per cent of GDP. Perhaps most important were those steps that helped to insulate the economy from politics, such as making the central bank independent, selling o ff state-owned companies, strengthening competition policy and improving the legal system. P ro g ress towards EU accession accelerated in parallel with economic stabilisation. Turkey signed an ‘association a g reement’ as far back as 1963 with what was then the European Economic Community. However, it was not until 1995 that the two sides signed a customs union agreement that abolished barriers to trade in goods. In 1999, the EU for the first time acknowledged Turkey as a candidate for membership. It took another six years b e f o re the Union decided that Turkey was ready to start accession talks. The negotiations officially began in October 2005, although in December 2006 EU leaders decided to suspend accession negotiations on eight chapters of the acquis until Turkey opens its ports and airports to ships and aircraft from Cyprus. Although Turkey’s path towards EU membership has been neither straightforward nor smooth, it has brought clear economic benefits. In the decade following the start of the customs union, EU exports to Turkey tripled
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