Turkey Needs to Restore Investor Confidence

The devil makes work for idle traders—a paucity of central bank meetings and major data releases means there will be plenty of time for investors to think about emerging markets next week. And so they should.

Turkey is back to work this week after an extended national holiday. Officials will need to get cracking on an urgent task—restoring confidence. The economy has been running hot for several years, inflation has got out of control and there has been too much borrowing in foreign currency. The US Fed’s tightening cycle hasn’t helped. But what really lit the fuse was President Recep Tayyip Erdogan’s heavy-handed management of the economy, Bloomberg reported.

Confidence has vaporized, and policymakers have narrowed the menu of options from which to choose. The main action so far has come from the central bank, which has engaged in stealth tightening, possibly to avoid drawing criticism from Erdogan. Experience of past crises suggests that this will not be enough to stem the crisis.

The commitment and determination of Turks is the guarantee needed to combat attacks on Turkey’s economy, Erdogan said on Saturday, in his first comments on the currency crisis in days.

 Germany Cozies Up to Erdogan

Germany has gone soft on Erdogan since he became the subject of attacks by US President Donald Trump. Leaders in Berlin are concerned that any instability might spread to Europe—and they want to send a message to the American government, Spiegel online reported.

Officials in Berlin political circles have often complained about Turkey’s president. There was the spring of 2017, when he accused the German government of adopting Nazi methods. Or when he explained to “his” compatriots, Turkish-Germans, in the German election that they shouldn’t vote for the center-right Christian Democrats, because they were “enemies of Turkey”. Or when he stayed silent after the Turkish press depicted German Chancellor Angela Merkel with a Hitler moustache.

Now, members of the German government are describing another president’s behavior as “outrageous” and “primitive”—not Erdogan but Trump, who picked a quarrel with Turkey and imposed duties and sanctions on the country, sending the Turkish lira into a tailspin.

Government officials argue that everyone knows the Turks don’t allow themselves to be intimidated like that. Ultimately, Trump will fail to secure the release of the imprisoned American pastor Andrew Brunson, they argue, and he will instead poison relations between Turkey and the West.

Now, it’s Trump of all people who is pushing Germany and Turkey back together.

The looming collapse of the Turkish economy is a genuine dilemma for the German government. It doesn’t want the Turkish economy to fall deeper into crisis, no matter what. “If Turkey becomes unstable, we’ll have a huge problem in Europe,” claim sources close to Merkel. They are worried about potential consequences for the eurozone and the German economy, about the three million Turks living in Germany and about the possible unraveling of the deal with Ankara that is preventing more refugees from making their way to Europe.

If it becomes necessary to act, officials in the German government argue, Germany will be at the front of the line.

 Aid to Turkey

Hardly anything would be less popular among the Germans than sending taxpayers’ money to the autocrat in Ankara. When Andrea Nahles, the head of the center-left Social Democrats, raised the possibility of German aid for Turkey, it was followed by a prompt denial from the government. German Finance Minister Olaf Scholz of the SPD also had little enthusiasm for the idea.

The fact of the matter is that many in Berlin believe Nahle’s suggestion was premature, but not fundamentally incorrect. Government spokesperson Steffen Seibert also didn’t broadly exclude the possibility of aid for Turkey. For the time being, everyone is pinning their hope in Turkey’s “self-healing powers”. But if they don’t suffice, it seems clear that Berlin won’t simply sit back and watch.

For now, German aid to Turkey has been restricted to rhetorical assistance. German politicians are outdoing one another in stressing Turkey’s immense importance as a partner for Germany and Europe. Merkel also emphasized Germany’s interest in a stable and “prosperous Turkey”.