All the world’s a stage

The AKP’s march towards what looks like a fourth successive election victory has fed fears that Turkey is becoming increasingly authoritarian. But while it is increasingly inclined to look elsewhere for its political inspiration and partnerships, its relationship with Europe continues to define its economic success.

Turkey’s elections in June have fed considerable debate about the future direction Turkey will take. Since Kamal Ataturk founded the modern state and set the country on the path of political pluralism and democracy, Turkey’s desire to integrate with Europe has been taken for granted.

It has often been presumed Turkey would wait patiently at Europe’s front door, while continuing to liberalise its economy and increase foreign trade for as long as it took for Europe to come around to the idea of welcoming its neighbour in.

For years, the logic has held up. While Europe has debated the merits of letting Turkey join, Turkey has busily integrated itself into the world economy. Its foreign trade increased from US$19.3bn in 1985 to US$400bn in 2014, according to figures cited by Kemal Kirisci and Sinan Ekim in a research paper for the Brookings Institute.

Europe’s decline, both economic and in terms of geopolitical relevance, and the growth of China in the east are starting to change that perception. How long will a country wait to become a member of a club that has repeatedly shunned it, and that has seen its own prestige chiselled away?

With the AKP Party looking set to win a fourth consecutive election there is increasing speculation that Turkey may abandon its European pretensions and pivot to the east, to the future engine of global growth and to its co-religionists in the Middle East.

Clearly, Turkey still has aspirations to integrate further with Europe. Yet the perception that the door has been slammed in its face has created the conditions in which the opposite is starting to happen. Political pluralism is deteriorating as life gets harder for opposition parties and journalists in Turkey.

Europe cannot be absolved of all responsibility for this. Much of the former reformist drive in Turkey came from its desire to become more European, with a view to eventually formalising this arrangement. As this dream has slipped further from reach, the momentum to reform has slowed and lately gone into reverse.

“Look at Serbia, the carrot of EU membership has been a really positive influence on politics there,” said Marcus Svedberg, chief economist at East Capital. Conversely, once members have joined, the EU loses some of its leverage, he said. Hungary, for example, has slipped on pluralism lately and the EU has found it harder to exert a positive influence than it did when it still had that leverage.

There is little doubt that the AKP, which has led Turkey down its current path for the last three parliaments since its first victory in 2002, will win the upcoming Turkish elections. Most polls predict the AKP will lose some seats – with support falling to 41%–45%, down from nearly 50% at the last election.

That will still give it a commanding voice in Turkish politics. Yet it is the expected progress of other parties that is gaining most attention right now.

“The pro-Kurdish People’s Democratic Party looks set to do well in the elections and this could set the agenda in the next government,” said Danny Tenengauzer, head of emerging markets and global FX strategy at RBC Capital Markets.

It is still unclear how this will impact on the AKP itself. It is likely to see several key government members leave, including the central bank governor. There has been speculation that Volkan Bozkır, the architect behind Turkey’s EU accession plan, could also leave office after the next election, leaving its plans for further European integration in limbo.

Who replaces them will determine where it goes from here. Will it use its mandate to consolidate its own power or will it push through greater reforms to open its economy and reopen EU accession talks?

These questions are crucial as Turkey looks to modernise its economy, attracting investment and training a generation of employees capable of producing the high tech exports of value in the global market.

“In the absence of such structural re-ordering, Turkey will continue to look like a typical successful manufacturing economy of the past century rather than one from the 21st,” said Kirisci and Ekim.

Suspicious neighbours

If Turkey’s appetite for reform is one variable, Europe’s interest in engaging with its easterly neighbour is another. There are strong strategic reasons for it to do so. Turkey sits on the doorstep of a politically problematic region and looks to be a potentially invaluable partner in a region where Europe could use friends. It could be a useful ally as Europe wrestles with challenges in Syria, Egypt, Saudi Arabia and elsewhere.

Yet Europe has not given the impression that fostering its ties with Turkey is a strategic priority. The US, too, has seen its relations with Turkey come under increasing strain amid differing policies over Syria, Iraq and terrorism. As relations with the West have become chilly, Turkey has become increasingly friendly with other emerging markets such as Russia, China and Brazil.

These developments have not always been comfortable for the West, yet there is little it can do. Turkey is well within its rights to push for closer political ties with other emerging markets with which it shares many strategic goals. But some worry that this could have negative implications if it is badly managed by the West.

Svedberg said: “Turkey’s drive to diversify its relationships will bring it economic advantages but it does make life more difficult politically. It is probably fair to say it has been badly handled politically – particularly the accession negotiations, which have created considerable resentment among Turks.”

Svedberg cites Ukraine as an example of what can happen when relationships are badly managed. In that case, the West forced Ukraine to choose between Europe and Russia.

“Turkey’s drive to diversify its relationships will bring it economic advantages but it does make life more difficult politically. It is probably fair to say it has been badly handled politically – particularly the accession negotiations, which have created considerable resentment among Turks”

“It should not make the same mistake with Turkey by making it choose between Europe and Asia. Turkey should be looking to do business with everyone; just like in any other commercial relationship, it is good to diversify,” said Svedberg.

Building its business ties with its neighbours to the east as well as the west is the best way to exploit Turkey’s natural geographical advantage as the bridge between Europe and Asia – just as Ukraine occupies the geopolitically crucial point through which Russian gas can be piped to Europe.

While Ukraine is a very different – and more extreme – case to Turkey, and the two countries are economically incomparable, it is striking that relations with the two most strategically important countries on Europe’s doorstep have been so badly handled.

Yet while relations between Europe and Turkey have at times been politically fraught, trade between the two continues to pay Turkey’s current account. Europe remains Turkey’s number one trading partner and while its dominance is eroding as the importance of Asia, the Middle East and the US increases, this trend is playing out very gradually: in 2010, Europe accounted for 46.5% of Turkish trade, falling to 43.5% in 2014.

And this decline owes as much to the decline of Europe as to any conscious attempt at economic reorientation on Turkey’s part.

Svedberg said: “Turkey’s economic ties with Europe and the US will be determined principally by Europe’s recovery and US growth. Politics will not be significant for these ties – though when it comes to its ties with other emerging markets politics is a bigger factor.”

Trade relations

Indeed, increased dialogue between Turkey and other large emerging markets is already translating into trade, where Turkey’s significant coastline and geographic proximity give it a big advantage in its ties with Asia, the Middle East and Africa, as well as Europe. Turkey already exports more to the UAE than it does to the US, while North Africa is also a Turkish market.

Turkish trade is not immune to the problems affecting many countries in this region. According to the Brookings Institute, Turkey’s exports to Egypt and Iran plummeted by 10% and 61% respectively between 2012 and 2014, while exports to the Arab world dropped by 5%. Between 2013 and 2014 exports to Russia and Ukraine fell by 15% and 21%, respectively.

The impact of the numerous wars and geopolitical tensions in the region is unlikely to disappear overnight and will counterbalance the trend towards greater engagement with other emerging markets.

“The South-South trade is increasing, the trend is established and it will continue, but it will take a long time for it to become the main driver of the Turkish economy. Its relationship with Europe will remain the most important one for the economy for the foreseeable future,” said Svedberg.

“We live in an increasingly multi-polar world. So maybe it makes sense for Turkey to avoid allying itself too closely with Europe, which is weak in terms of GDP growth and foreign policy clout, given it is almost impossible for all its members to agree on any action,” said Tenengauzer.

“Why should Turkey take sides in Europe’s disagreements with other countries? Most other countries are more pragmatic and act according to their interests in any given situation – even the US can work with Iran when their interests are aligned, as against ISIS. Similarly, there is no reason Turkey shouldn’t work with Iran, Russia, China, Japan or Europe in different situations,” he added.