Economic Developments in the EU and Turkey

Economic Developments in the EU and Turkey

December 2012

When the big economic crisis, or “great recession,” erupted in the fall of 2008 in the U.S., it was first thought by many in Europe that although the European economy would doubtless be affected by the crisis, its fundamental structures – notably in the financial sector – were sufficiently strong to significantly limit the impact. However, it soon became apparent that the crisis was badly affecting the EU as well. The union’s overall GDP fell by 4.3 percent in 2009. This was partly due to the close links between the U.S. and EU economies in many sectors, especially finance, as well as a number of inherent weaknesses in the latter. Similarities in the mainly neoliberal policies adopted in a number of relevant areas also played a part in some cases.

On the other hand, thanks to the large scale, mainly short term, measures also involving enormous government financial contributions taken by all major players in the world economy – including the EU – what looked like the first phase a recovery in the financial sector started as early as in 2010. However, unemployment in the EU – which was 7.1 percent in 2008 – had nevertheless climbed to 9.7 percent in 2010 and was not decreasing. By the second quarter of 2011, the financial sector in many EU countries was showing serious weaknesses, with many banks needing urgent fresh capital injections and with government deficits and debts rising dangerously in several countries. Current account deficit problems also existed in some countries, while a number of others displayed surpluses, a very large one in the case of Germany. Growth started to decrease again.

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These serious problems or their subsets mainly concentrated in periphery countries such as Spain, Italy, Ireland and with utmost severity in Greece. One of the reasons why the improvement was short-lived was the weakening of the continuation and cooperation at both international and to some degree EU levels with regard to fiscal and monetary policy measures, as well as financial regulation, once there appeared signs of improvement in the financial field.

 

A series of measures

One of the major sources of the difficulties the EU is facing in the economic field is the fact that while there is a common monetary policy and a single currency in the eurozone, this is not accompanied by a single fiscal framework for the eurozone, let alone for the whole of the EU. This discrepancy has been exacerbated by the crisis. The EU tried to remedy this shortcoming as well as the financial sector problems through a series of measures and packages agreed in summits, notably in August 2011 and June 2012.  A fiscal compact aiming at fiscal discipline has been agreed upon by 25 of the 27 members, the exceptions being the U.K. and the Czech Republic. However, for this measure as well as for the other ones implementation will remain critical. The establishment of the European Stability Mechanism which will have at its disposal a total of about 750 billion euros will also provide additional power to the EU authorities in terms of providing safety and making interventions required by financing needs and providing safety. The ECB has already averted a deep second crisis phase through unconventional monetary instruments, by providing finance to the banks so as to alleviate the latter’s needs as well the financing of the sovereign debt of a number of countries. Broad agreement has also been reached for establishing a banking union.

These institutional steps and new instruments are aimed at ensuring stability and a power to intervene within the EU economy when genuinely required by the prevailing conditions, and thereby allow the restart of growth in a sustainable way. However, the modalities involved and the actual implementation remain critical matters, as witnessed in the recent past.

 

Significant problems and some approaches

Despite these recent important decisions, the EU economy is still facing a number of significant problems.

On the economic front, these include the following: The critical situations of periphery countries like Spain, Italy, Greece are starting to have some contagion effect on the core countries, including to some extent Germany. Because integration has remained insufficient within the eurozone, imbalances grow and bring deflationary pressures, which could become excessive. The somewhat fragmented nature of the eurozone restricts the potential effectiveness of monetary measures, and the shortage of credit in some areas constitutes a significant obstacle to production. Regulation concerning the financial sector has not been realized sufficiently within the EU, while the lack of sufficient international cooperation in this field compounds the effect of this shortcoming. Sovereign debt and financial problems can reinforce each other to some degree. The EU average debt level has reached 85 percent of GDP, and social security funding is a growing problem in many EU countries as costs increase further.

On the other hand, the low level of investment pushes potential output to lower levels. The eurozone has technically entered a recession period with negative growth in the last two quarters. The EU-27 growth forecasts for 2013 and 2014 are 0.4 and 1.6 percent respectively. Investing in the “knowledge economy” is a particularly critical issue regarding the EU’s competitiveness. While fiscal consolidation is obviously necessary, the excessive pursuit of austerity will become counterproductive – aside from its human cost – which makes phasing a critical issue. A major loss of confidence in the future of the EU economy would have very negative consequences. The shortcomings in matters like agreeing on the EU budget have consequences which go even beyond the negative effects of having insufficient resources at the disposal of the EU. It is significant that the EU as a whole has a surplus in its current account and that the average budget deficit was 4.4 percent in 2011, which is high but also reflects unevenness in this area. In fact, the will and commitment to make balanced but effective common efforts to overcome the crisis and start dynamic growth in the EU economy constitutes one of the most critical factors involved. Unprecedented mention of the possibility of the break-up of the eurozone, (and even, in some cases, of the EU) shows the need for a stronger will in the direction of a cohesive EU, preserving at the same time the warranted spectrum of diversity and flexibility.

On the social front:  Rising unemployment – which has reached 11.6 percent as the EU average – and above all youth unemployment, is having a devastating effect on society. The level of 27 percent unemployment in Spain is clearly destructive from several angles. Rising poverty is reaching intensities unprecedented in Europe in recent history. Income inequality has been shown to be growing further in several EU countries. The inequality in access to education in the present era is going to have lifelong negative effects for the individuals concerned. Very slow population growth and eventual decrease is a cause for concern, rendering new immigration prospects more relevant. Fighting against global warming and environmental damage also needs new resources, while budgets are becoming tighter.

 

The EU’s economic development prospects

Although the EU’s short term economic prospects appear weak, this should not lead to pessimism. It is true that the EU is facing serious risks. But it also still has a significant potential to be a healthy, dynamically growing region of high and equitable welfare with a distinct role in a world to which it is closely connected.

The 2020 targets may be difficult to attain, but they are not out of reach. The EU has considerable resources in terms of economic, social, cultural, scientific, human, knowledge-based and institutional factors. It also has an important set of values. EU countries’ social rights constitute a valuable example in terms of fundamental principles. All these need to be taken into account alongside the shortcomings.

Furthermore, per capita income is very high. Prospects for the further development of the “knowledge economy” are positive. Provided the already decided measures are complemented with new ones in the economic (but also and specially in the social, gender equality, climate and environment and knowledge) fields, are in line with social democratic principles rather than the tried and failed neoliberal recipe, are applied adequately and equitably, and provided a strong will for common success is put forward wholeheartedly – assuming the world economy does not enter a new phase of major recession in the near future – the EU would be expected to have bright prospects. Some argue that the EU will experience very low growth for up to the end of this decade or even beyond. This neglects the EU’s high potential mentioned above. Higher growth is possible after a few years. Governance will be a key factor in this process, and the next three years will be most critical in this respect.

 

A few selected effects relating to Turkey

One of the most immediate and strongest negative effects of very low growth in the EU on Turkey relates to exports. The EU’s share in Turkey’s exports fell from above 50 percent to below 40 percent. The government’s view is that this does not matter because Turkey’s total exports are growing. This is erroneous for two reasons. First, although exports are growing and that this is a favorable factor, they have not increased sufficiently since the crisis so as to catch the pace needed to attain the 500 billion dollars target of 2023. Total exports were 132 billion dollars in 2008 and are expected to reach 150 billion dollars in 2012, a total increase of about 13 percent in 4 years. This is all the more relevant at a period in which Turkey’s growth is falling from a high rate of growth averaging 9 percent in the previous two years to a lower growth period with approximately 3 percent in 2012, while the current account deficit is expected to still be at over 7 percent. Second, the decrease in the share of exports to the EU corresponds to a decrease in the share of technologically more advanced goods. This negative trend already existed before the fall of the EU’s share in exports and has now become more pronounced, to the detriment of Turkey’s competitiveness. Rather than waiting for an automatic increase in   Turkey’s exports to the EU once the latter starts to grow more again, it would be better to work for participating further in EU value chains. This is not only to increase exports, but also to move further in the direction of technologically more advanced economic activity and also possible joint investments in third countries.

Provided the conditions referred to above are realized, the EU is poised to advance further in the direction of a knowledge economy. This will require an increase in the quality of and access to education in Turkey so as to participate to and compete better in such activities. Neglecting this objective would be detrimental to employment prospects. Unfortunately, especially with the recent law called “4+4+4,” the education system has been curtailed in Turkey. Therefore, one of the key objectives to be realized in Turkey needs to be an upgrade of the education system. This is also both an economic and a social objective with respect to convergence toward the relevant EU structures.

Mentioning another one of a small number of factors selected in this context, again provided it applies the necessary policies, the EU is likely to emerge stronger, more cohesive and with a better governance from this crisis situation, even if this does take a few years. Thus, Turkey also needs to significantly upgrade its governance structure affecting a vast array of areas such as in the economic, judicial and social domains – which has been particularly badly damaged in the last few years – so as to enhance its competitiveness and relevant convergence path.

 

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