Introduction

Turkey has made a commitment to join the European Union fully. Turkey’s accession to the EU will have significant implications for both the Union as well as Turkey in its individual capacity.  Turkey’s integration in the EU policies will have serious repercussions especially in the currency, interest rates, and inflation. Apart from the economic perspective, the integration to the European Union will also have other impacts such as international relations, regional and structural policies, internal market and related policies as well as institutional and budgetary aspects (Audas, Maniam, & Leavell, 2013). This chapter will have an in-depth analysis of the impacts and implications resulting from turkey’s fully participation in the economic and monetary union. It will look at the possible challenges and opportunities associated with Turkey’s accession to the European Union.

Analysis

It is interesting to point out that the entry of Turkey to the European Union will be a challenging exercise for both the EU and Turkey. For several years, Turkey has been a member of the union but going to full membership will ultimately be a challenging exercise.  Besides opening up the Turkish economy to the rest of the union members, the accession is likely to have a major impact on the currency as well as other economic indicators. With the country’s entrance into the union, there are high chances that the country’s economy will be moving away from the previously high distorted boom-and-bust economy to a stable economy.  Entrance into the union means that the country will embrace the use of the Euro currency (Kahraman, 2000). Consequently, this will imply that the local currency will also increase in value and stability as it must match the other euro partners.

Other monetary aspects such as inflation and interest rates are also expected to change significantly. Unlike in the past where the country faced instances of economic volatility, the accession will lead to some financial stability. The accession to the European Union implies that the fiscal and monetary policies adopted are in agreement with the EU policies. Such systems will ensure a decrease in interest rates and appreciation of the Turkish Lira (Frieden, 2014). Nevertheless, any attempt of embracing policies that are inconsistent with the European Union will ultimately lead to a depreciation of the Turkish currency as well as an increase in interest rates. Such a move would be detrimental to the economic stability of the new member (Audas, Maniam, & Leavell, 2013). Lower interest rates will be necessary for improved trade and integration and consequently a stable economy.

It is also prudent to note that the accession of Turkey to the European Union implies that the banking industry in the country will be under the management of the Union. For several years, the fiscal and monetary policies in most of these banks are mostly imported. Nevertheless, entry of the country into the European Union means that the banking sector will be monitored by the European fiscal and monetary policies (“Turkey and the EU: Issues and Challenges | 50 Years of Intereconomics”, 2016). The policies must ensure that the interest rates and levels of inflation in the member countries are as stipulated in the policies. Before the entrance, most of the private banks in the country opted for high-interest rates so as to have increased profits.  The high-interest rates in the country explain the persistence of boom-bust economy witnessed in the past. However, with the eurozone experiencing an economic crisis in the past, there are high chances that the European Union will be proactive in the preventing banking crisis that is detrimental to economic stability (Kahraman, 2000). The high external debt experienced by Turkey has been as a result of increased government borrowing as opposed to the borrowing by the private sector. However, lower interest rates will motivate private loan and reduce government borrowing, a move expected to deal with the debt burden.

It is worth noting that Turkey is considered as a lower middle-income economy.  Currently, its per capita income is relatively small compared to the European Union. Nevertheless, her entry into the union will most likely lead to the major development of the economy. Free movement of people, goods, and services, as well as the use of a single currency, is expected to have a significant boost to the economy. The country is also said to have a massive population that is estimated to be about 70 million. Most of this population will get employment both domestically and to other European members thus leading to an increase in the GDP. Lower interest rates will lead to increase in foreign direct investment in the country which will also improve the economic status of the country (Frieden, 2014). Entry into the Union will mark an end to the past volatilities in the Turkish economy. Low-interest rates, a decrease in inflation and increased employment will be key drivers for Turkey’s economic recovery under the European Union. All these economic indicators will be complimented by a strong local currency.

Besides implications to Turkey’s economy, the accession will also have major implications for other members of the union. Although her population is relatively large as compared to other members, its GDP represents slightly over 2% of the EU GDP. Consequently, the accession process is likely to have asymmetrical benefits. For instance, the integration will ensure increased trade in goods and services (Audas, Maniam, & Leavell, 2013).  Full membership to the union means removal of all tariffs, even in areas such as agriculture, where tariffs previously existed. Also, the process will lead to the reduction of non-tariff barriers, and this move would ensure increased integration between different members of the union. Such a move would be not only beneficial to Turkey, but also to other members of the union. An increase in exports will ultimately lead to an increase in the value of the currency as the demand for the local currency increase. It is projected that Turkey is likely to have significant gains especially from sales of agricultural products in the region. Trade liberalization will have better and meaningful benefits to the overall economic development of the country.

On the same note, Turkey’s full membership to the European Union would lead to an ultimate increase in demand in the present member states. Such an increase in demand is likely to bring about increased productivity, and simultaneous fall in prices mainly in the services sector. The enhanced productivity together with price competition might amount to significance increase in the GDP of Turkey (“Turkey and the EU: Issues and Challenges | 50 Years of Intereconomics”, 2016). The integration process is likely to reduce the unemployment rate in the region. An increase in employment rates implies that most of the country’s population will be employed and will have a substantial amount to spend and save. Increased savings means that there are sufficient funds for the people to borrow and consequently banks will lower interest rates to motivate people to increase their borrowing. Increased borrowing means that the population can invest the borrowed money and this will eventually lead to increase in the country’s GDP.

Over the years, Turkey’s financial system has been susceptible to the crisis, and this has consequently affected the investor’s confidence. Nevertheless, her entry into the European Union means that the previous macroeconomic and structural imbalances may be a thing of the past. The union will ensure that there are micro and macroeconomic policies that will ensure restructuring in the country’s financial sector. Entry into the Union will imply that the banking sector in Turkey will meet the international standards and this will boost the economy significantly. In the wake of the recent crisis in the euro zone, it is expected that the union will have strict regulatory and supervisory standards that will prevent recurrence of such crisis in the future. Such a move will be instrumental for a stable economy that will attract local as well as foreign investment necessary for economic growth (“Turkey and the EU: Issues and Challenges | 50 Years of Intereconomics”, 2016).  Although there have been substantial capital flows between Turkey and other European members, there has been still room for improvement especially in the foreign direct investment to Turkey. However, total participation in the union will increase the potential and consequently lead to a stable currency.

Conclusion

In a nutshell, Turkeys’ decision to become a full member of the European Union will have a significant impact not only on her economy but also to other members of the union. Although it will be a challenging exercise, the success of the accession will largely depend on the preparedness and the approach involved in the process. Nevertheless, it is certain that the entry to the European Union will likely to have positive effects on the currency of the country. Other economic indicators such as inflation, interest rates, and employment are also likely to receive a significant boost from the move (“Turkey and the EU: Issues and Challenges | 50 Years of Intereconomics”, 2016). It is, however, prudent to point out that stabilization of the macroeconomics in the region remains the ultimate challenge in the accession process.

References

Audas, S., Maniam, B., & Leavell, H. (2013). SHOULD TURKEY JOIN THE EU?. Journal Of International Business And Economics, 13(4), 183-188. http://dx.doi.org/10.18374/jibe-13-4.16

Frieden, J.(2014). Currency politics (1st ed.). Princeton University Press. New York.

Kahraman, S. (2000). Rethinking Turkey‐European union relations in the light of enlargement. Turkish Studies, 1(1), 1-20. http://dx.doi.org/10.1080/14683840008721218

Turkey and the EU: Issues and Challenges | 50 Years of Intereconomics. (2016). 50years.intereconomics.eu. Retrieved 10 December 2016, from http://50years.intereconomics.eu/turkey-and-the-eu-issues-and-challenges.html

 
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