Insight Turkey Debate II: Europe's Crisis: Turkish and Greek Responses
Insight Turkey Debate II
30th May, 2012
Opening: Ihsan Dağı
In his opening remarks, Ihsan Dağı outlined the goal of the second Insight Turkey Debate and the plan to organize debates like this every three months after the current issue of the journal was published. Following this first successful debate, the second one addressed the European Debt Crisis. The participants were asked to elaborate on its causes and results, evaluating it from both a Turkish and Greek perspective.
Dağı continued with a short presentation of Insight Turkey, which is a quarterly journal, published in Ankara and employing authors from around the world and of which he is the Editor-in-Chief. Insight Turkey is an important source and point of reference, not only to understand and analyze Turkey’s economy and Turkish foreign policy, but the region as a whole. The goal is, not only to be an academic journal, but one, which understands and grasps the current developments on the ground and at the same time doesn’t compromise on its academic credentials and depth.
Dağı, then, introduced the debaters: Erdem Başcı, the Turkish Central Bank Governor, Prof. Dr. Asaf Savaş Akat, a faculty member at Bilgi University, Murat Yülek, a faculty member at THK University, and Dimitris Tsarouhasi, a faculty member at Bilkent University. Dağı underlined that all of these speakers had already published an article in the current issue of Insight Turkey.
The first speaker was Erdem Başcı, the current Turkish Central Bank Governor. In his speech, he elaborated on the measures and precautions the Central Bank took to face the crisis in Turkey after 2008.
According to Başcı, the crisis in Turkey was neither caused by a public debt deficit nor a budget deficit. The private sector became overly indebted, which appeared as a current account deficit. Hence, the problem was to balance domestic and foreign demand and to gradually overcome the current account deficit.
Başcı stressed that the problem in Turkey is an extremely fast credit growth in contrast to Europe, where the problem lies in a sluggish credit growth. Consequently, Turkey adopted a markedly different financial and economic approach than Europe. The Central Bank chose to counteract the crisis with precautionary measures on the macro level instead of resorting to using a monetary policy. This was in part, due to an extremely undervalued Turkish Lira during the period prior to August 2011. In doing so, Başcı argued, they were able to control the credit growth. Furthermore, Başcı argued that all G-20 countries implemented expansionary monetary and fiscal policies after the Lehman Crisis, which caused a serious drop in the production potential and trade worldwide, and an increase in the unemployment rate. Başcı explained that Turkey’s implementation of precautionary measures, although risky, had a positive outcome on Turkey’s economy, and it continues to follow this line of macro-economic thinking.
Başcı continued arguing that the main goal of the Central Bank is price stability alongside the legal goal of contributing to financial stability. According to him, indicators for these two goals are (1) inflation expectations and (2) credit growth rate and favorable exchange rates. Başcı stated that the Central Bank concentrated on credit growth, because controlling the growth rate of credit results in a decrease in inflation and at the same time leads to a drop in credit rates and a reduction of the current account deficit, which can positively contribute to financial stability. He explained that three types of economic policies can be adopted and will be examined: (1) credit policy, (2) interest (rate) policy, and (3) liquidity policy. Başcı then continued elaborating on how the liquidity policy works, stressing its advantages in regulating credit flow.
Başcı, then, explained how these new structural changes impacted the required reserve payments of banks. The Central Bank under Başcı now gives banks the possibility to make 45% of these payments in the form of foreign currency. According to Başcı, this regulation offers banks a cost benefit option. This regulation includes additional liquidity for the banks if necessary. Başcı made it clear that this is all done on a voluntary basis and banks are still able to make their payments solely in Turkish Lira.
Başcı continued elaborating on a newly discussed policy, which he called “fine-tuned automatic equalizer.” In times of financial growth and prosperity, Başcı explained that banks are likely to run into debt when there is high foreign currency liquidity available. The idea is that the banks, when running into debt, stock the greater part of the foreign currency liquidity at the Central Bank. In return, the Central Bank will give them Turkish Lira. Accordingly, Başcı argued that this would help overcome the need for ‘money traffic.’ Başcı further explained that the Central Bank would stock foreign currency, which could be used later when the foreign currency isn’t liquid. This practice would ensure that the Central Bank wouldn’t need to buy or sell foreign currency. During periods of abundant liquidity, banks will automatically stock foreign currency at the Central Bank and during periods of shortage, the banks are able to withdraw currency from this stock.
In addition to this “fine-tuned automatic equalizer,” Başcı added that other means were also available, like additional monetary tightening policies, which include temporary precautions concerning liquidity. According to Başcı, this additional monetary tightening policies need to be powerful, effective, and temporary, otherwise they aren’t useful. Başcı argued this has a slowing effect on the increase of credit rates and a positive effect on exchange rates only manipulating the liquidity levels of the Turkish Lira.
As a result, Başcı explained, that the Turkish Lira is on the rise. Consequently, the Central Bank is expecting to see an improved picture at the end of the year than was previously assumed. He also stressed that at this point the balance between exports and imports is in order and that real exports have increased. He further explained that the credit growth rate was at 40% when they started and now they are expecting a rate of only 14% for the end of 2012. He also stated that the employment rate is increasing, the inflation rate is dropping, and the current account deficit is diminishing.
Concluding his speech, Başcı stressed, that the main goal of the Central Bank is and will be price stability, which is why they refuse to discontinue their current monetary policy. Başcı explained that 35 years of high inflation took their toll on the Turkish economy and that he is not willing to let that happen again.
Asaf Savaş Akat
The second speaker was Prof. Dr. Asaf Savaş Akat, a faculty member at Istanbul Bilgi University. After thanking Insight Turkey for the gracious invitation, Akat outlined the content of his speech. He started stressing that he, unlike Başcı, will be talking about the long and medium term monetary policy.
He began by stating that it was useful to review the economic history of Turkey and consider current policies in the context of long-term economic performance. Akat argued that Turkey’s performance was never more than average. According to him, the last 60 years can be divided into four economic phases: (1) import substitution, (2) breaking into the market, (3) “financial consolidation” and (4) economic balance and sustainability. Akat further explained, that phases (1) and (2) both ended with a crisis; phase (3) did not end with a crisis in 2010, to everybody’s surprise; and phase (4) just started.
Overall, Akat argued that since the 1980s there has been an underlying effort to improve public finance and that exports and imports of goods and services have continued to rise. Thus, Turkey’s international expansionary policy has been a success [Based on data given by the World Bank.]. Akat reported that Turkey has the lowest debt ratio of all the major European countries. He continued elaborating on Turkey overcoming inflation, which is challenging. Akat said that dollarization, as a result, slowed down. Furthermore, Akat explained that there is normalization in interest rates. According to Akat, the independence of the Central Bank played a major role in serious structural reforms related to controlling the banks and balancing their financial assets. Akat admitted that the course of action given by the IMF and the EU was important but also pointed out how “helpful” they were to Greece. What is important, according to Akat, is whether a government is ready to follow this course, which was the difference between Greece and Turkey.
Akat used the opportunity to state his opinions about the AKP and the current government. According to Akat, the AKP are instinctively financially conservative, which contrast with the former government. Akat argued that there is a balance between financial conservatism and pro-market solidarity in Turkey, wondering why this didn’t happen in Greece. Akat continued arguing that this gave Turkey the chance to open itself up to foreign capital investments and privatization. Akat admitted that this raises the question about the origin of the deficit, because all this data indicated that Turkish finances are developing well. Akat explained that this is the Dutch Syndrome. Akat further explained, that if a country is able to secure financial stability, although neither local nor foreign actors believe this is possible, but fails to take financial precautions to balance this stability, then the increase in value of its currency is inevitable. As a result, the savings of the private sector decrease.
Akat continued talking about balancing the economy, which was the same topic that Başcı previously discussed, explaining that Turkey isn’t another Greece but could be another Spain. He, however, stressed that there is something important, which Başcı left out: a sustainable external deficit (e.g. unpaid project credits). Akat pointed out that the so-called no-debt-financing reached relatively high levels, which (together with the probable increase of credits) might make the targeted 5% inflation rate unrealistic. He also pointed out that there are problems rooted in the global economy. The first of these problems, Akat explained, is the European Debt Crisis. According to him, the European Crisis could strike Turkey from two angles: (1) it could have a negative impact on the real economy through exports and (2) it could cause financial turmoil in the market. The second global problem would be the increase in petrol prizes, which increases inflation and alters the terms of trade. Akat considers the “wait and see” policy as critical, because global conditions don’t take individual countries into account. Akat admitted to the partial recovery in the trade balance and external deficit. According to Akat, there are only few regulating policies that are effective when the conjuncture is negative. Akat identifies having only a few effective regulating policies as a Turkish weakness.
Ending his speech, Akat pointed out that there are also advantages arising from the crisis. He argued that being a growing country when the world is slowing down is an advantage Turkey needs to use wisely.
The third speaker was Murat Yülek, a faculty member at the University of Turkish Aeronautical Association.
Murat Yülek began his speech elaborating on the reasons why the crisis had such a strong effect on Europe. According to him, the EU suffered most from the crisis, whereas Asia wasn’t affected as much. Yülek argued that theoretically, Asian countries should have been the most affected, because Europe and the USA are their main markets. It was expected that these export-based economies would experience a shortage in demand. However, this did not happen. Yülek explained that the USA recovered fast, but the European countries didn’t. To understand the reasons for this, Yülek further explained, it is important to know on what basis and on which framework the EU stood, when the crisis hit Europe. According to Yülek, there have been difficulties in Europe, which weren’t only of an economic nature. Following Yüleks argumentation, these problems were (1) a weak institutional structure within the EU, (2) difficulties making political, monetary or economic decisions due to institutional weaknesses, and (3) lack of competitiveness.
Yülek emphasized that the lack of competiveness was a serious problem within the EU. Except for two “star” countries, Germany and Switzerland, which Yülek described as the only countries in the EU that are competitive, he stated that there is no movement towards this goal at all. He further explained that the Euro was the last straw.
Yülek continued elaborating on a comment of the Italian Prime Minister who said: “If Greece, or any other country, contracts out of the Euro-system, Germany will get the better of it.” Yülek identified a monetary union as something important and favorable, pointing to the USA, as the best example for a working monetary union. Yülek actually identified the monetary union as the source of the strong US economy. If countries like Greece bail out of the monetary union, Yülek continued, then they won’t be able to export goods into the countries within the union as easily than before, because in a union like this, the currencies of countries like Italy and Greece are over-valued. Yülek, then, continued answering the question, why Germany would profit from Greece leaving the monetary union. According to Yülek, Germany is one of the star countries in this context, which managed to become more competitive and efficient in the course of the 13 years since the Euro. It has a dynamic and strong economy, which –according to Yülek – forces the non-competitive countries to work even harder or to bail out.
During the next part of his speech, Yülek explained that the financial crisis actually ended two years ago and what the Europe now experiences is its aftermath. According to Yülek, the problem is that nobody can ascertain how long this aftermath will impact the European economy. Focusing on why the EU was confronted with such a problem, Yülek explained one reason was the lack of financial discipline in public finances, which was believed to exist based on the Maastricht Criteria but which obviously wasn’t. The other reason was related to banking. Here, Yülek elaborated on the Spain-example. He explained that Spain joined the EU in the 80s, which immediately led to a bubble in real estate, Spain being a warm and sunny country. This bubble continued without any control until 2008. A bubble in real estate prices leads to a bubble in bank assets. The problem now, according to Yülek, is that it is unknown how long this bubble will go on or when it will explode and how this will regulate the assets and the real estate prices and how much of these regulations will have to be subsidized, which is why the impact of the crisis cannot yet be ascertained.
The last speech was presented by Dimitris Tsarouhasi, a faculty member at Bilkent University in Ankara. He also thanked Insight Turkey for the invitation. Tsarouhas expressed how difficult it is to follow up on excellent presentations and to outline the Greek case, particularly, when talking about the kind of public administration reforms that the Turkish authorities have undergone in comparison to the Greek situation. Beginning his speech, Tsarouhas outlined the two main points of his speech: (1) why Greece is in the situation it is now, because Tsarouhas believes that the Greek crisis is rather different then the Irish or South European Crisis and (2) the Euro-Zone factor, meaning that Europe didn’t use the opportunity to erase the crisis at its beginning and now is battling to save the Euro-zone and EU unity.
Tsarouhas explained that the successive public policy reforms in the early 2000s weakened Greece in terms of the capability of reforming its public administration and its welfare state. According to Tsarouhas, Greece already had serious problems at the time when it entered the EU and the monetary union. Tsarouhas argued that the Greek government then failed to develop an effective public administrative system. Instead of speedily moving on with public policy reforms, which would allow the country to be much more competitive and therefore to have a sustainable and competitive position with the EU, Tsarouhas argued, the public authorities used the new cheap credit that was provided through low interest rates. Moreover, when Greece entered into the Euro-Zone, the low and cheap credit fueled economic growth and this was further exacerbated through excessive and eventually unsustainable public spending. According to Tsarouhas, this had nothing to do with the global crisis or the EU-Zone crisis. However, what the global crisis did was reveal the unsustainability of Greek public finances, a crisis which was already present.
Continuing his speech, Tsarouhas stressed that the origins of the crisis are not solely economic. According to him, politics have an enormous impact on the Greek predicament. Tsarouhas substantiated his argument based on two examples: (1) the inability of the Greek government to settle on a number for the account deficit and politically sustain it in order to bring about the reforms it had promised and (2) the inability of the government to communicate the origins of the crisis to the Greek population and, therefore, giving radical left/ anti-democratic movements an opportunity to gain power.
Referring to his statements at the beginning of his talk, Tsarouhas then explained why the Greek crisis is different than the crises in Spain or Ireland, for example. He argued that these countries followed unsustainable policies related to their banking sector, which caused concrete failures in the implementation of their policies. This meant that they did not have the ability or the means to adjust to the EU standards necessary. Furthermore, he argues that the EU is following policies based on harsh austerity politics, which penalizes the possibility of growth.
In the last part of his talk, Tsarouhas elaborated on three areas where the EU handled the Greek crisis wrongly: (1) timing, (2) policy choice, and (3) policy mix. First, on the issue of timing, Tsarouhas argued that when they took action, it was already too late, because the first reaction to the crisis came seven month after it erupted. According to Tsarouhas, this may be a short time in the political sense but not in market time. Unfortunately, markets will not wait for the next EU counsel decision. Second, regarding policy choice, Tsarouhas argued that the EU, which was led by a conservative coalition of governments until very recently, has rejected successive ways by which the Greek crisis could have been lessened. For example, one way, according to Tsarouhas, would have been to declare the Greek debt European debt. Tsarouhas explained that his would have given a clear and decisive message to the markets that the EU would not be held captive by a single country. Tsarouhas elaborated that the EU did not use macro-economic policies to coordinate its members and by choosing this kind of policy, it lost the opportunity to rid itself of the crisis early on. Third, concerning policy mix, Tsarouhas explained that the EU introduces policy reform programs for all countries entering the bail-out-mechanism. These programs focus on the consolidation of public finances through a mix of spending cuts, tax increases, and public policy reforms. According to him, these programs have failed in the Greek case, because they have been heavily frontloaded, meaning a heavy emphasis was laid on public consolidation through a sharp rise in tax revenues and, at the same time, cuts in public spending. He argued that the Greek public administration wasn’t capable of carrying out these reforms. Therefore, the second part of the reform program - structural reforms - was neglected. Tsarouhas further argued that this imbalance within the programs has meant that the Greek government doesn’t have the time or the ability to introduce reforms in a way that will make them sustainable.
Concluding, Tsarouhas emphasized the need to be optimistic and that time still has not run out to politically handle the crisis. He is convinced that the new political balance of power, which is emerging in Europe with the election of François Hollande as French president, is going to finally introduce an alternative way of handling the crisis.