Asli Karahan-Ay is the chief investment officer of Lioness Capital.
NEW YORK — Turkish President Recep Tayyip Erdoğan’s “unorthodox” economic policies have caused a train wreck.
Turkey is suffering from a balance of payments crisis, rising poverty, high unemployment and soaring inflation. As of writing, the Turkish lira has lost around 70 percent of its value against the dollar in 2021, about 33 percent of it in November alone. This is a danger not only to Turkey but to its neighbors — and it is in the European Union’s best interest to stabilize the country and re-anchor it to the West.
The good news is that the EU has a tool it could use to achieve this: the euro. The EU should offer Turkey the ability to partially adopt the euro, without it becoming an EU member country, in exchange for policies that would rebuild Turkey’s badly damaged democratic institutions.
Why would the EU do this? Because, even though Turkey is no stranger to political and economic crises, this time, an implosion would likely engulf the EU alongside it. Turkey hosts more migrants and refugees than any other country in the world — 3.6 million people — and a deep economic crisis in Turkey will almost certainly unleash a new wave of immigration into the EU.
Such an agreement would also come with significant advantages for the bloc. It would give the euro more international heft, an oft-mentioned strategic objective, especially if the arrangement were later replicated to stabilize other regional allies like Lebanon, or perhaps even Ukraine.
Turkey has a sizable economy that is equivalent to roughly 5 percent of the eurozone’s GDP. The elimination of currency risk would boost bilateral trade and investment flows and help European companies expand their footprint in Turkey, employing its relatively cheap, young and productive workforce as supply chains are relocated out of China.
Most importantly, allowing Turkey to adopt the euro would not cross any of the union’s political red lines. It would entail no freedom of movement for Turks in Europe, no participation of Turkey in the European Parliament, or any European institution, and certainly no full EU membership. The arrangement would require no EU treaty changes and would fit well within the bloc’s idea of strategic “privileged relationships.” It would also minimize the tail risk of Turkey becoming an increasingly Islamist, unstable state at the periphery of Europe.
So what does it mean to partially adopt the euro? The legal precedent for this — what is called a “monetary agreement” — already exists between the EU and Andorra and San Marino, two microstates that are not part of the EU but, like Turkey, are part of its customs union. With a monetary agreement, Turkey would gain the right to adopt the euro as its legal tender and have the right to issue euro coins — bills would be issued by the European Central Bank (ECB) only.
in this scenario, the EU would not be underwriting Turkey’s debt, and Ankara would not get a seat on the ECB’s Governing Council until it met all five Maastricht Treaty criteria regarding inflation, budget deficits, government debt-to-GDP ratio, exchange rates and long-term interest rate stability.
Realistically speaking, Turkey is unlikely to abide by those criteria for at least another decade or two, perhaps even longer. And if and when it does, its representation on the ECB’s Governing Council would be restricted to an observer status, giving it virtually no power over monetary policy.
In exchange for allowing Turkey to join the EU only monetarily, Brussels should ask for democratic reforms, including the reestablishment of freedom of media (traditional and online), the release of hundreds of journalists and politicians, a monitoring role over Turkish elections, a return to administrative and academic independence in universities and the privatization of state-owned banks to reduce corruption and nepotism.
Why would such an arrangement be attractive to Turkey? To be sure, it would lose its flexibility to devalue its currency to boost competitiveness next time it faces economic headwinds. But adopting the euro would also solve a multitude of problems for the Turkish economy, eliminating its chronic inflation problem and making the country an attractive investment destination with low interest rates, high growth and no currency risk.
It would also be a relatively easy transition. Some 55 percent of Turkish bank deposits are already denominated in foreign currencies — mostly in euros and the U.S. dollar. Turkey-EU trade is already large and growing after two decades in the customs union. In 2020, trade with the EU accounted for 41 percent of Turkish exports and 33 percent of its imports. The adoption of the euro would also accelerate the Turkish financial sector’s alignment with European banking and financial laws and regulations, increasing the sector’s credibility.
If executed properly, the adoption of the euro could be completed in less than a year, in contrast to Turkey’s moribund EU membership process, which has already been dragging on for decades. As a point of comparison, after Ecuador adopted the U.S. dollar in 2000, the Ecuadorian sucres ceased to be the legal tender less than six months later.
Finally, for domestic political purposes, Turkey’s adoption of the euro would be a powerful economic and political anchor, symbolizing the country’s entry ticket to eventual European-level prosperity. Despite being mostly symbolic with no real economic impact, euro coins featuring the image of the republic’s founding father, Mustafa Kemal Atatürk, would be popular with the Turkish public. This could help overcome knee-jerk nationalistic resistance in the country.
It is often said that one should never let a crisis go to waste. Turkey’s monetary woes provide Brussels and Ankara with an opportunity to reset a bruised relationship, deepen trade and strengthen economic ties, while avoiding the political minefield that is Turkey’s EU membership.
The EU should welcome Turkey into its monetary union, and Turkey should be eager to join. Atatürk would no doubt have approved. And with his intelligent, piercing eyes and enigmatic smile, he’d look good on the euro coin.
