Turkish businessman Zekeriya Mete can see his country’s most important trade partner from his desk. His office in Istanbul has a clear view of the Bosphorus strait, and on the other side, Europe’s shore. Mr. Mete founded his company in the 1990s, importing Western goods such as chewing gum and hand cream and selling them in Turkey and Russia. “Back then, business was great, we grew rapidly,” the importer recalls.
But over the last two years business has been slowing. Europe has drawn away from Turkey, not only in fear of terror attacks but also because of President Recep Tayyip Erdoğan’s ceaseless rhetoric. Investment in Turkey is dwindling, and the country’s trade deficit stands at around $62 billion, or €57 billion. “We feel the effect of this stagnation every day,” Mr. Mete says.
If Turkey is indeed at the mercy of European trade, couldn’t more economic pressure force Mr. Erdoğan to come to his senses – for example in the heated debate over Turkish politicians making campaign appearances in Germany? German Finance Minister Wolfgang Schäuble recently flirted with this idea when he excluded closer economic cooperation with Turkey as long as Die Welt journalist Deniz Yücel remains in Turkish custody.
The European Union and Turkey are bound together by a customs union agreement. Yet Europe still has power to wield. European treaties are not a get-out-of-jail-free card for sanctions, and thanks to controllable borders, export restrictions would also be a possibility. In fact, they could be highly effective. “Turkey couldn’t cope with sanctions,” Erdal Yalcin, expert on Turkey at the Ifo Institute for Economic Research in Munich, said. Almost half of Turkish exports are to the European Union, around 10 percent to Germany alone – making it Turkey’s most important trading partner.
“Even the threat of not bolstering the partnership would cause the value of the Turkish lira to fall.”
And there are other ways to exert pressure on Mr. Erdoğan. Turkey is angling for more tariff-free trade. In mid-February, Turkish Vice-president Mehmet Simsek visited Berlin looking to deepen the two countries’ customs trade agreement. Ifo-expert Mr. Yalcin estimates that Turkish GDP could grow 1.8 percent in the next decade if free trade were extended from just industry to include agriculture and services. A best case scenario could see Turkish exports to the European Union increase by up to 70 percent.
But Germany is stonewalling. “The customs union is increasingly suffering from import limitations and trade barriers on the part of Turkey,” the ministry said. Negotiations between Germany and Turkey continue regardless of diplomatic skirmishes. But Berlin is waiting for the result of Turkey’s referendum on the new presidential system, which would increase Mr. Erdoğan’s power, before proceeding any further.
The possibility of a stronger trade agreement, which can only happen with the European Union’s blessing, could itself become a way of reining in Mr. Erdoğan. “Even the threat of not bolstering the partnership would cause the value of the Turkish lira to fall,” Mr. Yalcin says.
Then, of course, there is the profound leverage of cold, hard cash. Last year Germany alone supported Turkish domestic development with €376 million – mostly as loans from the state-owned KfW Development Bank. The European Union has promised Turkey a total of €4.5 billion between 2014 and 2020 to advance democracy and civil rights, and further €6 billion to support the 3 million Syrian refugees living in Turkey. Germany is to contribute just under € 1 billion of this figure.
Of course, Europe could makes cuts here, too. “The question is,” Mr. Yalcin warns, “will these measures hurt Erdoğan, or just the Turkish people?”