As a nation, Turkey has applied to accede to the European Union as a part of the economic community. However, since 1963, Turkey has existed mainly as an associated member of the EU. Based on the accession process, negotiations began in 2005 and had become a controversy. It is viewed that the passage of Turkey to join EU would have tremendous benefits to the country both politically and economically. Turkey has a thriving economy, and in 2014, the country witnessed a GDP growth of about 3.5%. Additionally, the country weathered the economic downtown much better than most of the European countries. This paper discusses the trade, inflation, interest and currency issues that would arise if Turkey obligates to the euro as a currency and examines any other qualitative concerns connected to the Turkish agreement to the European Union.
Discussion
Regarding currency and inflation, the accession of Turkey to the EU would mean the country adopts the use of Euro instead of its own currency. Over the past, Turkey has fluctuations in the Euro/dollar exchange has significantly affected Turkey economy. The effect has been twofold. The first effect has been through the responsibility of the euro in the Turkey’s exchange rate system and the second is through the largest share that EU countries have on Turkey’s international trade.
Delegate your assignment to our experts and they will do the rest.
Börzel, and Soyaltin, (2012) explains that the year 2000 saw Turkey launch a comprehensive disinflation program that sort to put a Turkish Lira against a basket of $1 and 0.77 euros. The program sort to take gain of the passing through the exchange rates to the price levels. In effect, the program lowered the inflation rate. However, when the US dollar took an upward turn with a rapid appreciation against the Euro the effects of Turkish exchange rate basket on inflation was weakened. From 2000 – 2010, the Turkish Lira depreciated by 26.5% against the US dollar and 6.5% against the Euro. The implication is that the mechanism to price indices was much stronger in relation to American Dollar than for Euro. The dollar performs better in the international market than the Euro. Consequently, the inflationary expectations of Turkey have followed the dollar changes lagging above the target levels.
Turkey has often suffered hugely due to the depreciation of the Euro against the dollar losing its competitiveness vis-a-vis Europe. The events have followed the rise in imports from Europe to Turkey and a negative growth of export from Turkey to other EU countries. It, therefore, follows that the depreciation of Euro has led to Turkey having a trade deficit. Additionally, the weak Euro has weakened the economy of Turkey. As of 2000, Turkey opted to shift its reserves from Euros to dollars (Özer, 2016).
From the above analysis, it is evident that the Euro currency will do more harm to Turkey if the accession happens. Turkey will operate on the euro currency which over the past has weakened its economy. However, when Turkey joins the EU, they are more likely to experience an improved inflationary performance (Özer, 2016). If Turkey operates like an EU entity other trade factors that would cause a higher level of inflation will be changed, and the ECB would set the inflation rates for all Euro member states keeping it low.
Trade
The accession of EU by Turkey will have several impacts on trade for Turkey. The impacts include the following: first, Turkey will have an increased trade in both goods and services. Accession will result in removal of trade tariffs and other quantitative restrictions that Turkey currently face in the EU market. The removal of such tariffs will further deepen the trade integration between Turkey and EU. The restricted bilaterally trade such as trade in agricultural goods will be removed. Turkey has made progress to re-orientate its export to include value addition by use of technology. The last decades have also seen the EU re-orientate from Asia to EU market. In general, the accession will lead to an expanded trade for Turkey due to increased trade flows (Commission for the European Communities, 2004).
The second aspect of the trade is the integration into a single market. The full integration of Turkey into the EU will lead to increased demand for their products due to market size effects. Turkey will experience a productivity hike as well as a fall in the prices in the service sector. The productivity hike will, in turn, leads to a GDP increase for Turkey. Value addition, especially in the agriculture sector, is expected to bring with it more in terms of GDP. The accession will make the structure of the Turkish economy to be aligned with the EU economy generating effects that result from participation in the same market with the EU. Due to severe economic imbalances that Turkey has witnessed over the past, the country’s financial system has been susceptible to the crisis of investor confidence. The alignment with EU as a result of the integration will boost the investor confidence of Turkey improving chances for Foreign Direct Investments (Commission for the European Communities, 2004).
The third issue is about the investment opportunities. Accession will mean a more liberalized capital flow from EU to Turkey. The capital flow in terms of Foreign Direct Investments has been mainly low over the past. It implies that Turkey does have an enormous unused potential of foreign investors. For example, in May 2004, ten countries joined the EU. Following that move, the perspective of EU membership triggered Foreign Direct Investment in the countries by EU companies. Moreover, the conditions for private investment shall also increase in Turkey due to spending from Structural Funds of EU. The high growth of Foreign Direct Investments will not only improve Turkey’s GDP but also lead to the transfer of technology, wealth accumulation increasing the growth potential of Turkey (Börzel, & Soyaltin, 2012).
The other trade issue will be labor migration. Even before the accession, there already is a migration of workers from Turkey to other EU member states. Accession will result in removal of barriers to free movement of labor. As such, migrations may either be to EU countries or Turkey due to increased Foreign Direct Investment. However, it is expected that much of the migrations will involve movement out of Turkey to EU in search of employment opportunities (Commission for the European Communities, 2004).
On Interest, Turkey stands a better chance of having as their bond yields reduced. The perspective of joining the EU will give Turkey greater security because they shall belong to a stronger currency. The same happened to Greece, Spain, and Ireland. Additionally, Turkey will experience lower transactional costs due to low interest for member states. Moreover, the accession into EU will reduce the cost incurred by Turkey on Bonds due to reduced interest rates (Börzel, & Soyaltin, 2012).
The other qualitative issues related to the Turkish Accession to EU include opening up of EU to the Middle East and vice versa. Despite the troublesome Turkish-Arab relation, the EU ‘territory’ will be expanded nearing the Arab countries (Özer, 2016). Consequently, the Eu foreign policy interest will be extended to the East. The accession is seen as a potential extension of the EU frontier to the East.
However, there is the issue of the economic performance of Turkey as it plans on the accession. The country’s GDP in 2011 was 9% but dropped to 3.5% by 2014 (Avci, & Carkoglu, 2013). It GDP per capita is less than half that of Europe. Such weak economy may have a financial implication on the EU. The country is big and poor with unequal distribution of wealth. The implication may be several migrants to the EU on top of over 10 million Turks already residing in the EU (Özer, 2016). The implication of these into EU may cause a financial burden to the European Union.
Turkey is not a member state of the Europe Union. Additionally, it is not a European country. Its existence in Asia makes it an invaluable bridge for EU to Asia. Its accession to the EU will be critical in reinvigorating the relation of Europe and the fast-growing countries of the East. Despite performing poorly economically, the country has weathered better than some of the European countries from the recent economic downturn. This paper has discussed the issue of Currency detailing how Turkey might experience a weaker currency moving from its disinflationary mechanism of depending on the dollar. Additionally, the paper contends that Turkey will experience lower interest rates on bonds due to joining a stronger currency (Euro). Regarding the interests rates, Turkey stands to benefit from lower bonds and interest rates as a result of the accession. Moreover, Turkey will benefit from lower inflationary rates as the rate will be controlled by the ECB for all EU member states. Finally, Turkey will benefit from increased trade, increased movement of labor, improved GDP and Foreign Direct Investments. The outlook for Turkey has a better economic future despite the fewer challenges it may face in the accession process.
References
Avci, G., & Carkoglu, A. (Eds.). (2013). Turkey and the EU: Accession and Reform . Abingdon-on-Thames: Routledge.
Börzel, T. A., & Soyaltin, D. (2012). Europeanization in Turkey-Stretching a Concept to its Limits? (No. p0036). Berlin: Free University.
Özer, Y. (2016). Turkey and the European Union: processes of Europeanisation . Abingdon-on-Thames: Routledge.
Commision For the European Communities. (2004). Issues Arising From Turkey’s Membership Perspective. Commision Staff Working Document , 2-53.
