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RISKS FROM THE ECONOMIC CRISIS IN TURKEY

(December 2021)

Daskalakis Hippocrates

Tombra Alexandra

Turkey has been experiencing a currency crisis for months with a significant impact on the real economy due to the President's insistence on a low interest rate policy. The Turkish lira has been facing a devaluation of approximately 45% against the USD since the beginning of the year, resulting in inflation soaring to 21% (official data for the end of October) and the consequent decline in the purchasing power of society. The Turkish central bank has consumed a significant part of its foreign exchange reserves in an unsuccessful attempt to support the Turkish lira, resulting in concerns about the ability to repay loan obligations. Of course, despite the impressive rise in Turkish public debt to 200 billion USD, external debt remains low at approximately 60% of GDP.

Obviously, Erdogan, with his policy of low interest rates, expects to gain immediate benefits from investments, consumption, exports and tourist flows, so that with the horizon of the 2023 presidential elections, he can stop his downward course and strengthen his position by even proceeding with pre-election benefits. We could say that he is implementing an internal devaluation and credit expansion in an attempt to reverse the course of GDP, which has been on a steady downward course in recent years.

Despite the continuous slide of the Turkish lira, the censure of central bankers and finance ministers, the Turkish economy is not on the verge of collapse for a number of reasons that have to do with its special characteristics and certain positive macroeconomic figures. Of course, the interaction of the monetary crisis with the real economy, in conjunction with the reactions of Turkish society, may trigger developments in the country's political scene or, in a rather extreme case, even lead it to the brink of collapse.

We should not overlook the fact that all Western countries want to replace President Erdogan with a more "cooperative" and less unpredictable person. In this direction, some countries seem willing to undermine the Turkish president without risking a rupture with Turkey, an important ally and partner, but also with the valuable investments and loans they have in it.

However, the main concern for us in Greece lies in the possibility of a Turkish provocative action with a high risk of military conflict to distract attention from the poor course of the economy and ensure Erdogan's re-election through an external success or even by invoking external dangers. Given the Sultan's extreme tendency for military involvement throughout the region, it is possible to risk another step to the detriment of Hellenism.

It may seem that the engagements in Syria, Iraq, Libya and Nagorno-Karabakh suggest a similar conclusion; it must be understood that the military confrontation with Greece entails much more serious risks for Turkey and for the AKP regime. Despite any tactical advantages that a surprise move by Ankara - having the initiative of the moves - may bring, Athens' response must be dynamic, massive and on all fronts. This possibility, if accompanied by adequate means of projecting military power, trained personnel, the will of the government and the people and the correct transfer of the message to the other side, will likely act as an obstacle to the undertaking of risky moves. The deterrent credibility will be strengthened if it is accompanied by corresponding warning messages from major and neighboring powers.

Turkey may proceed with a provocative, high-risk move (e.g., entering a drilling rig on the Greek continental shelf) that will force Athens to respond dynamically with successive mutual escalation. And in this case, Ankara must be concerned about the possibility that the Greek response to the provocative action will be asymmetric and will be accompanied by a preemptive strike of great intensity. If Erdogan realizes that a similar Greek reaction is predetermined but also an inevitable one-way street for any Greek government, he will need to weigh the risk of exceeding certain limits to serve his electoral expediency or his Ottoman grandiosity. Less risky for Ankara, although harmful to Greek interests and mainly prestige, would be the repetition of provocative actions such as those that took place in 2020 in the EEZ of the Republic of Cyprus and on the Greek continental shelf.

In conclusion, the apparent lag of the AKP due to the economic crisis certainly tempts the risk of another external adventure. However, targeting Greece entails high costs that the Sultan may not want to assume at the moment since there are easier internal and external “victims”. For the decision on a possible external export of the crisis, he will certainly take into account international developments and balances, with the situation in neighboring Ukraine causing reasonable concerns of a rekindling of the Cold War.

However, we should expect a dramatic increase in psychological pressure and the strategy of coercion against us, which should not lead us to any retreat, but without being carried away by reckless moves. Any decision for military conflict taken by our side should ensure the maximum chances of our overwhelming victory and not constitute a desperate move or a reaction of our (justified) emotional and wounded prestige that will obey impulsive voices. However, for this crushing blow we must constantly prepare at all levels, with the hope that it will not be necessary.

Daskalakis Hippocrates

Antgos ea, Doctor of International Relations, Director of Studies, ELISME

Tombra Alexandra

Journalist, economist