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Last Updated: Tuesday, 4 October 2005, 12:02 GMT 13:02 UK
Turkey reforms spurred by EU dream
By Robert Plummer
BBC News business reporter

Turkish lira
The revalued lira is a powerful symbol of Turkey's new economy

In economics as in other areas of life, the carrot of EU entry talks has encouraged Turkey to embark on reforms that were arguably a good thing in their own right.

But whatever its motivation, the government in Ankara has worked to ensure that the country's decades of high inflation and economic instability are consigned firmly to the past.

Analysts say that since Turkey's last economic crisis in 2001, Prime Minister Recep Tayyip Erdogan's administration has carried out more reforms than in the previous 70 years. The central bank is now independent and runs a tight monetary policy.

For ordinary Turkish citizens, the biggest indicator of that change was the revaluation of the currency at the start of this year, when one million old lira became one new lira.

But since then, other structural changes have followed, including a wave of long-heralded privatisations that have seen control of companies such as Turk Telekom and Turkish Petroleum Refineries (Tupras) pass out of state hands.

Growth has been strong, too, with the International Monetary Fund predicting an annual rate of 5% for 2005 and 2006.

So has Turkey done enough to bring its economy into line with EU standards? And how much of a shock on both sides would full EU membership entail?

Virtuous circle

For some observers, Turkey's historic problem has been that political weakness has bred economic weakness.

For much of the 20th Century, the average lifespan of a Turkish government was about 15 months - hardly long enough to establish a strong macro-economic framework.

By the time Turkey becomes an EU member, you may not have the type of handouts that were available to Spain or Greece
Mehmet Simsek, Merrill Lynch

EU membership would reinforce the country's new-found political stability, turning a vicious circle into a virtuous one and driving further economic changes, they argue.

But many European politicians fear the potential drain on resources involved in admitting a large and relatively poor country that, on current demographic trends, would become the EU's most populous nation by 2035.

Merrill Lynch's emerging market economist Mehmet Simsek, himself a Turk, takes a more optimistic view.

"Initially, Turkey will be a net recipient [of EU aid]," he told the BBC. "But I think probably from 2018, 2020 onwards, Turkey will actually be a net contributor to the EU budget, on the basis of the fact that Turkey is currently growing three to four times the EU trend growth."

Figures issued by the Turkish government's State Planning Organisation back up this view, suggesting that the country's contribution to EU coffers could be as high as 9bn euros a year by 2020.

Farm aid

The burden of supporting Turkish farmers would certainly impose huge strains on the EU's Common Agricultural Policy, which still absorbs a big share of its budget, even after recently-approved reforms.

Turkish Prime Minister Recep Tayyip Erdogan
Mr Erdogan has striven for economic and political stability

But Turkey is no longer as dependent on agriculture as it was. In 1950, it accounted for half the country's GDP, but this has now shrunk to about one-eighth.

Nonetheless, it still employs nearly one-third of all workers and is a big export earner.

In any case, Mr Simsek does not see Turkey benefiting from the kind of farm aid that existing EU members enjoy.

"The last enlargement members got less and less EU aid and assistance," he said.

"One should assume that Europe will reform its Common Agricultural Policy and therefore, by the time Turkey becomes an EU member, you may not have the type of handouts that were available to Spain or Greece."

Economic integration

Turkey's huge foreign debt, which stands at about 80% of GDP, is far higher than in any of the recent entrants to the EU, casting doubt on the durability of its current economic stability and causing more potential headaches for Brussels.

But whatever happens to Turkey's hopes of EU membership, it already has strong financial links, since about half its trade is with EU countries.

An estimated 2.5 million Turks now live in Germany, and with the Turkish population set to increase as EU birthrates decline, a growing labour shortage in Europe is likely to favour Turkish workers.

Holidaymakers from major European nations are also the main source of income for Turkey's booming tourism industry, which is now the country's second biggest revenue earner.

As a result, all indications are that if Turkey's bid for EU entry ultimately fails on political grounds, economic factors are likely to ensure that close co-operation will continue.


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