Turkey in Trouble – What Does This Mean for Central Europe?

The Turkish lira lost half of its value in one year. The exchange rate now seems to be stabilizing, but the situation is not resolved for the medium term and the process is more complicated then in July or August. What will be the outcome for Turkey?

“Turkey's economy is under siege, just like its borders,” -  Turkish President Recep Tayyip Erdogan said during the annual meeting of the ambassadors of Turkey in the middle of August. At that time, the situation of the lira was the at its low point. According to the Turkish head of state, the President of the United States stands personally behind the currency crisis that may lead to economic collapse in Turkey. “Not even a president can introduce new taxes on steel after he wakes up in the morning. Countries make such decisions based on professional calculations. After all this, how can we trust him?” - the Turkish head of state referred to Donald Trump. The President of the United States has announced sanctions against Turkey, since the authorities in Ankara are unwilling to release a convicted American Presbyterian accused of participating in the Turkish coup attempt in 2016. Therefore, Washington doubled the customs duties on steel and aluminium coming from Turkey as well as punished two Turkish ministers with sanctions. As a result, the value of the Turkish currency began to fall. In one week, the lira lost 28 percent of its value in comparison with the US dollar. Since the beginning of the year, the lira’s value has fallen by no less than 40 percent.

This would be bad for Turks traveling abroad only. However, there might be some positive effects as well, especially on the incoming tourism in Turkey. - As it was emphasized by Tourist Specialist Róbert Richárd Kiss. Prices are thus becoming more and more convenient for foreigners, which would be a good thing for the Turkish tourism, since it was compromised by political instability and terrorist attacks in the recent years. Therefore, many tourists may choose Turkey as destination for holiday, instead of other similar but more expensive places.

The problem is that, as in many other Central European countries, most of the loans were denominated in foreign currencies, especially in US dollars, in the past few years. Not only will millions of Turkish families can go bankrupted soon, but a significant part of Turkish companies can follow them, since they are being hit by the rising level of instalments of dollar loans, in addition to the sanctions. 

The Turkish Finance Minister and the President of the Central Bank announced that they will take all the necessary steps to revive the lira and the likewise-falling stock market. However, all countermeasures proved to be ineffective so far. In fact, one thing is still left to be done. Turkey did not raise the prime interest rate radically, because the president I against it. According to the new constitution, the president has full power in the economy as well. Instead, President Erdogan called on Turkish citizens to sell all of their gold and foreign currency reserves in order to buy lira, thereby strengthening the national currency.

The Turkish currency crisis has shaken the European markets as well, as the euro has touched bottom in comparison with the US dollar in the period of one year. The German Foreign Minister has said that the German government follows the development of the situation with great concern. “The state of affairs in Turkey is very worrisome. Turkey is an important partner of the European economy as well as of the German companies.” - As it was said by Heiko Maas. Then he added that the situation can only be alleviated by the joint efforts of diplomats from Ankara and Washington.

The free fall of the lira was perceptible even in Japan. As it was announced by a spokesman from the Kremlin, Moscow is ready to move from the dollar to national currencies in its bilateral trade relationship with Turkey. 

According to Russian Foreign Minister Sergei Lavrov, this time, not only the Syrian war meant the main guiding principle of the negotiations, but the collaboration in the encounter with the common enemy. During a press conference at the weekend, President Erdogan himself defined the Americans as enemies. During the joint press conference of the head of the Russian diplomacy and his Turkish counterpart Mevlüt Cavasohlu, it was stated that US sanctions against Turkey are illegal and the dollar will not be strong long. “I think that the obviously excessive use of the US dollar will sooner or later lead to the fade of its decisive role, which will come to an end eventually. Even those countries that are not affected by US sanctions will rely on their trusted partners.” - As it was emphasized by the Foreign minister. Then, he added that Turkey, Russia and China have already started moving towards the use of national currencies in their trade relations.

In the meantime, the Turkish head of state announced countermeasures by Turkey. The government in Ankara has doubled the custom duties on several American products such as tobacco, liquor, cars and consumer electronics. Ankara now introduced a 140 percent custom duty on bourbon whiskey and 120 percent on muscle cars. The prolonged conflict between Turkey and America has a serious negative effect on Central Europe, in many aspects. On the one hand, the forint, the zloty, and the Czech crown have lost from their value recently. It happened despite of the fact that the economic fundamentals of Central European countries are far more secure than in Turkey. This is not necessarily a bad thing for our industry and tourism. However, the uncertainty that reaches every emerging market is not beneficial for neither the Hungarian nor the Polish or the Czech economy. In fact, political uncertainty is even worse. On the eastern wing of NATO, Turkey and the United States are both important allies for these countries. No leading figures in the region want to be in a position in which they would have to choose between Washington and Ankara.

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The GLOBS is the only magazine in Hungary that focuses on foreign affairs and trade. The topics cover the different aspects of social life, business and culture (especially business culture), research and development, investment opportunities, charity initiatives, and the everyday life of the diplomatic delegations.
 
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