More than most economic crises, the one Turkey is now facing is the work of one man alone: Recep Tayyip Erdogan. He has been in office for 16 years, during which he has amassed more and more power and put into place the irresponsible and often idiosyncratic economic policies that are responsible for the plunging of the Turkish lira.
Turkish voters could have put an end to this many times, but instead returned him to office, stood by passively as he imposed emergency rule after the 2016 failed coup and granted him extraordinary powers under an amended constitution. In the meantime, he presided over an economic boom built on cheap money, imported capital and real estate development.
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It couldn’t last and by this spring it was obvious that the end of the boom years was approaching. But again Turkish voters re-elected Erdogan with full knowledge that not only would he continue pursuing his bizarre economic strategy – whose centerpiece concept is that high interest rates cause inflation – but that there would be no institution legally empowered to resist him.
And that is what is happening. The Turkish lira is in free fall, which will leave Turkey’s dollar-indebted corporate sector with debts they can’t repay, threatens to create a banking crisis, will stoke Turkey’s already high inflation rate and could easily push the economy into a deep recession.
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There isn’t any easy way out of this for the government, but the obvious immediate solution would be for the central bank to raise interest rates far higher than they are now to at least stabilize the exchange rate. That is what any ordinary government would have done long before its currency has lost 40% of its value, as the lira has done.
Instead, the Turkish central bank (which is now beholden to Erdogan) and the finance minister (related to him by marriage) offered some aspirin in the form of extra liquidity to the banking system at a time when major surgery is required. For now, at least there will be no rate rise or capital controls that would stem the decline. The option of an International Monetary Fund bailout seems unlikely, too, because it would require Erdogan to adopt policies he deeply opposes and accept a humiliating future of taking orders from an overseas institution.
If the first prong of Erdogan’s economic policy is fantasy, the second one is an equally dangerous one of paranoia. Rather than owning up to the errors that have pushed Turkey into a crisis, the president has been telling Turks it’s all about foreign conspiracies aimed at putting Turkey in its place.
“We are facing economic attacks today, and we need to defend our country,” Erdogan said last week in remarks that are typical of his approach. “The economic attack against us now is the same as the coup attempt against us.” With that, the president has urged ordinary Turks to change the euros, dollars and gold “that you are keeping beneath your pillows” into lira and step up exports.
Erdogan may well get his extra exports, but not because patriotic Turkish industrialists answer his call but because the value of the lira has collapsed, which makes the goods more price competitive overseas. As to selling dollar and buying liras, it simply won’t happen; indeed, the reason why the lira has been depreciating as it has is because Turks have for quite some time been bailing out of their currency. Erdogan’s policies give Turks no good reason to change their attitude.
The Turkish economy is doomed, but will it drag the rest of the world with it? Since Trump announced he was doubling tariffs on imported steel and aluminum from Turkey, not only has the lira sunk but so have world stock markets and many emerging market currencies.
The concern is two-fold. The first is that European banks have considerable exposure to Turkish corporate debt, and there are real worries about how that debt will be repaid. The second is fear that other emerging market economies face the same problems of dollar indebtedness and rising dollar interest rates as Turkey. My guess is that both concerns are overblown, but there are two good reasons to be wary. One is that the interconnection of markets makes it very difficult to measure risk, as the 2008 financial crisis amply demonstrated. The other is Donald Trump.
The president increasingly seems all too ready to employ economic warfare against his enemies without considering the wider implications of what he is doing. The list of countries facing new sanctions or stepped-up sanctions, or higher tariffs is growing quickly: Mexico, Canada, the European Union, China, Japan, Russia, Iran and now Turkey. In each instance, the immediate impact on the global economy is limited, but each time Trump acts the cumulative effect grows.
The sense is growing that the world economy is endangered and that might explain why Turkey’s financial crisis has sent off shockwaves the way ones in Argentina and Indonesia just a few weeks ago did not. Bad enough that Erdogan is acting like an irresponsible child, but there’s little confidence that Trump is playing the role of responsible adult.