Turkey: The turn away from democracy will also harm the economy

Turkish President Recep Erdogan has now achieved what he has sought for so long: The constitutional referendum of 16 April went in his favour by a narrow majority of 51.4 to 48.6 percent. This means that the change he sought to the Turkish constitution, and the concentration of executive power in the President’s palace, will now take place. The opposition cited severe disadvantaging in the campaigning and has also pointed to irregularities in the vote counting and intends to challenge the outcome. Not that they have any great prospects of succeeding.

With the result of the referendum Turkey has turned its back on a parliamentary democracy, its statutory rights of control, and on the separation of powers within the state. What is alarming is that around 63 percent of the votes cast by Turks living in Germany were in favour of Erdogan’s constitutional reform. From now on the president will essentially determine Turkey’s domestic and foreign policy, as well as the thrust of its economic policies alone. And he is even permitted to do so as the leader of a political party. The referendum has thus eliminated the status of the office of the president as an agency above party politics. Against this backdrop, it is to be feared that the polarization within the country, as documented by the tight result, will not necessarily ease. Erdogan has already indicated that he is not interested in “consensus talks” with his opponents. At any rate, 16 April did not mark a step towards bringing peace to the country.

It is already clear that Erdogan will initially extend for another three months the state of emergency imposed in mid-2016 after the attempted coup against his autocratic regime, and under which the constitutional referendum took place. In other words, Erdogan wants to rule for the foreseeable future by decree and without checks and balances – or the inclusion of parliament. The plan is for the constitution as now envisaged to come into power definitively with the coming presidential election in 2019. The periods of office he has already served will then not be considered as playing a role in the number of times he can be re-elected. This means that, should he be re-elected in 2024, he could remain in office as the political autocrat until 2029.

The result of the referendum is bad news for the Turkish economy: At present there are hardly any prospects of the country swiftly and enduringly overcoming its economic crisis, which is defined by weak private investments, inflation and high trade deficits. The short-term expansionary fiscal measures of last autumn, that boosted growth in GDP just in time for the referendum, say a lot about the nature of Erdogan’s approach: He evidently considers it opportune to deliver economic benefits that favour his “core electorate”, specifically the lower and middle income groups, in an effort to woo their loyalty. His fans evidently failed to notice that the VAT reductions of last autumn come to an end on 30 April. It is possible and indeed probable that we will see a downturn in consumer sentiment, which leaped over two index points in March to reach 67.8, its highest level for this year. Neither Erdogan’s tax gifts nor the short-term boost to housing construction give cause to expect a sustained stimulus that will improve macroeconomic conditions, especially as government debt has recently moved appreciably upwards. The current account is likewise out of kilter, with the deficit now around four percent of GDP, which will remain a burden. It is doubtful whether the outcome of the referendum is now likely to encourage foreign investors to inject more capital into the politically divided country. Thus the pressure to devalue the Lira will essentially persist, triggering new price increases for imported goods. The central bank will sooner or later see cause to raise interest rates again, to the extent that Erdogan lets it.

The European perspective on Turkey, including possible EU accession, has definitely dimmed in the wake of the approval for an autocratic presidential system and the elimination of all democratic control mechanisms. What political leverage does the EU then have to bring influence to bear on Erdogan to moderate his policies? The negotiations on an expansion of the customs union with the EU could be such a lever, especially as Europe is by far the most important sales market for Turkish industrial exports. However, one should at present not expect too much of such a tactic.

 

Under these conditions, the Turkish economy will only grow slowly. The tense political and economic climate, capital outflows, a trend for interest rates to rise, and the forthcoming end of the expansionary special measures of last autumn are likely to limit GDP growth to a maximum of two percent both this year and next year.

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