Turkey - Economic and Monetary Policy

Candidate countries conduct negotiations with the European Union (EU) in order to prepare themselves for accession. The accession negotiations cover the adoption and implementation of European legislation (acquis) and, more specifically, the priorities identified jointly by the Commission and the candidate countries in the analytical assessment (or ‘screening’) of the EU’s political and legislative acquis. Each year, the Commission reviews the progress made by candidates and evaluates the efforts required before their accession. This monitoring is the subject of annual reports presented to the Council and the European Parliament.

ACT

Commission Report [COM(2011) 666 final – SEC(2011) 1201 – Not published in the Official Journal].

SUMMARY

The 2011 Report notes a robust economic recovery in Turkey. The market economy is functioning and is able to cope with competitive pressure. However, the Report regrets to report a rise in trade account deficits, and external imbalances. Some structural reform needs to be implemented.

EUROPEAN UNION ACQUIS - (according to the Commission’s words)

EU legislation on economic and monetary policy contains specific rules requiring the independence of central banks in Member States, prohibiting direct financing of the public sector by the Central Bank and prohibiting privileged access of the public sector to financial institutions. Upon accession, new Member States will be expected to coordinate their economic policies and will be subject to the provisions of the Stability and Growth Pact on budget monitoring matters. These States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro. Until their adoption of the euro, they will participate in Economic and Monetary Union as a Member State with derogation and will treat their exchange rates as a matter of common concern.

EVALUATION (according to the Commission’s words)

The economy of Turkey is currently experiencing a robust economic recovery. Public finances are improving and confidence in a lasting transformation of the country's economic prospects and stability is increasing. Nevertheless, the rapid expansion of economic activity, driven by strong domestic demand, has led to significant and rising external imbalances that pose a threat to macroeconomic stability.

As regards the economic criteria, Turkey is a functioning market economy. It should be able to cope with competitive pressure and market forces within the Union in the medium term, provided that it accelerates the implementation of its comprehensive structural reform programme.

The economy expanded rapidly in 2010 and in the first half of 2011. Along with the high GDP growth, strong employment growth allowed for a decrease in unemployment. As a result of primarily higher cyclical revenues and a lower interest burden, the consolidation of public finances remained on track. The financial sector has shown considerable strength thanks to earlier reforms while the legal system continues to function relatively well. Moreover, the new law on State aid monitoring and the operation of the regulatory authority may increase transparency and lead to a reduction of State aid. The free interplay of market forces has been confirmed. Privatisation has accelerated. The EU remains Turkey's most important trade partner and investor.

However, trade and current account deficits have been rising and external imbalances are now significant. Monetary policy has been only mildly successful in curbing credit growth, which along with high commodity prices, continues to feed Turkey's growing current account deficit. More support from the fiscal side, and some specific and targeted micro-prudential measures are being elaborated, including by the banking regulator, in order to help engineering a soft landing of the economy and ease the burden placed on monetary policy. Turkey's price and cost export competitiveness has slightly worsened. Inflation has started to rise, in large part due to pressures stemming from energy and food inputs, buoyant economic activity and hikes in administrative prices. A more resolute implementation of structural reforms is awaited. Measures to increase fiscal transparency and better anchor fiscal policy were modest, while they could help Turkey to gain credibility in the markets. Market exit remains difficult and bankruptcy proceedings are still relatively cumbersome.

Turkey has made some progress on economic and monetary policy. The Central Bank adopted a new policy mix to ensure financial stability, reducing policy rates while increasing reserve requirements for the banking sector. Turkey's alignment with the acquis on economic and monetary policy is not complete, particularly as regards the full independence of the Central Bank and the prohibition of privileged access of the public sector to financial institutions. The overall level of preparedness is advanced.

RELATED ACTS

Commission Report [COM(2010) 660 final – SEC(2010) 1327 – Not published in the Official Journal]. The 2010 Report presented the economic and monetary strategies adopted by the country following the international financial crisis. The authorities have also been very active in improving their economic relations at international level and cooperation with neighbouring States. However, progress was still required in aligning Turkish legislation with the acquis, particularly in the financial institutions sector.

Commission Report [COM(2009) 533 final – SEC(2009) 1334 – Not published in the Official Journal].

Commission Report [COM(2008) 674 final – SEC(2008) 2699 – Not published in the Official Journal].

The November 2008 Report highlighted the continuing problems. The Central Bank was still not totally independent and monetary financing of the public sector and privileged access of public authorities to financial markets were maintained. However, measures taken to coordinate and reform economic and monetary policy have enabled the country to progress towards a more stable macroeconomic framework.

Commission Report [COM(2007) 663 final - SEC(2007) 1436 - Not published in the Official Journal]. The November 2007 Report found that progress had been made as regards economic and monetary policy. However, certain steps had still not been taken, in particular provisions for the independence of the Central Bank. The European Commission also noted that economic policy formulation remained fragmented and often insufficiently coordinated. In general, preparations in the field of economic and monetary affairs were at an advanced stage.

Commission Report [COM(2006) 649 final - SEC(2006) 1390 - Not published in the Official Journal]. The November 2006 Report found that Turkey had made little progress as regards monetary policy but rather more in terms of economic policy. Legislation to prevent monetary financing of the public sector and to prohibit privileged access of public authorities to financial institutions was not in line with the acquis. The absence of economic impact assessments and efficient coordination and cooperation reduced the effectiveness of economic policy.

Commission Report [COM(2005) 561 final - SEC(2005) 1426 - Not published in the Official Journal]. The November 2005 Report noted some progress in the field of economic policy. Alignment on the acquis in the monetary policy field remained limited. However, the capacity to implement an effective economic and monetary policy was still held back by the lack of an effective system for coordinating formulation, cooperation and implementation.

Commission Report [COM(2004) 656 final - SEC(2004) 1201 - Not published in the Official Journal]. Its October 2004 Report found that Turkey had made no progress in adopting the EMU acquis, covering direct public-sector financing by the Central Bank, prohibition of privileged access by the public sector to financial institutions, and the independence of the Central Bank.

Commission Report [COM(2003) 676 final - SEC(2003) 1212 - Not published in the Official Journal].

In its November 2003 Report the Commission noted that no progress had been made in this field.

Commission Report [COM(2002) 700 final - SEC(2002) 1412 final - Not published in the Official Journal]. Its October 2002 Report found that no further progress had been made as regards direct public-sector financing by the Central Bank. The same was true of the prohibition on privileged access by the public sector to financial institutions and the independence of the Central Bank.

Commission Report [COM(2001) 700 final - SEC(2001) 1756 final - Not published in the Official Journal]. In its November 2001 Report the Commission found that Turkey had made progress in the adoption of the economic and monetary union (EMU) acquis.

Commission Report [COM(2000) 713 final - Not published in the Official Journal]. The Commission's November 2000 Report found that little progress had been made in the area of economic and monetary policy.

Commission Report [COM(1999) 513 final - Not published in the Official Journal].

Commission Report [COM(1998) 711 final - Not published in the Official Journal].

See also