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Turkish EU Deal is a Game Changer

Just as Turkey seemed to be sliding into escalating violence and chaos, an opportunity arose and President Erdogan agreed to 3 Billion Euro aid package with the EU.  The impetus of the deal was the increasing migration mess in Europe and especially in Germany recently.  Turkey holds the key to solving this migration problem and has been bearing a huge burden and cost over the past few years.  Over 2 million Syrian refugees are in Turkey.

Essentially, the deal boils down to this:  Turkey is offered significant aid and a renewed effort in terms of European integration.   The following points are key to keep in mind:

  1. The Turkish bid to join the EU has been slowed by both sides over the past few years.  Both Germany and France were against accession of Turkey for political and other reasons.  Geopolitically, the two main countries would lose political power if Turkey was admitted.  In short, Turkey would shift the balance of votes towards southern Europe.
  2. In recent years, Turkey has turned east towards the Arab world and has also improved relations with Russia and China. In fact, in a major military bid for missiles, China was considered the front-runner to win the bid.  This would have been a major blow to the NATO alliance.
  3. In my view, Europe was short-sighted by slowing the process of EU accession with Turkey. This caused a reduction of enthusiasm on the Turkish side over the years as well.  Europe was also nervous of expanding EU borders to the Iraqi, Iran and Syrian borders.  But as the recent migration crisis has shown this was misguided thinking.
  4. On the Turkish side, this deal is positive for many reasons. First of all the substantial aid package of 3 Billion Euros.  Second, it comes at a very critical time in terms of deflecting attention of the voters from the recent terrorist attack in Ankara.  Third, it is strongly supportive of the AKP (the current party in power) for the upcoming elections.  The upcoming Merkel visit to Erdogan in Turkey right before the November 1st elections boosts the image of the AKP party.
  5. The deal can also be seen to have important economic consequences to Turkey in the future. This will also boost the current party, AKP, for upcoming elections.  It also takes away the recent statement by the rival center-left party, CHP, that they would move relations closer to Europe.
  6. To understand this more fully, it is important to keep in mind that Turkey under the current government has been more involved in the Middle East in terms of foreign policy. The electorate has grown tired of this and has been blaming the government on a failed policy. The recent terrorist attack in Ankara by ISIL was very negative for the current government for the upcoming elections.  The government has responded by trying to tie the PKK terrorist group into the attack, but this does not make sense except for domestic political consumption.
  7. By speeding up the process of EU accession, it will also have side-benefits in terms of the Kurdish problem in Turkey. Why would 20% of the population which is Kurdish want to separate from Turkey if the chances of gaining an EU passport are greater?  The answer is that would not, thus this will reduce tensions in the medium to long-term.
  8. Finally, the US must be extremely pleased by this agreement. It has strongly pushed over the years for the EU to accept Turkey.  Let’s not forget that Turkey is a very very strategically located country and one of the most important US allies.  The last thing the US would want is for Turkey to slide closer to China and Russia.

Key Themes:

The probability of the AKP party winning the elections has greatly increased.  The markets will see this as a positive outcome, mostly because the other parties don’t have a track record on the economy.   This deal will deflect attention from the recent terrorist attack in Ankara and deteriorating economic conditions in Turkey, both of which were negative in terms of votes for the AKP. Finally,the Turkish Lira will gain which will be positive for domestic politics and upcoming elections.

Turkish democracy has weakened in the past few years, but if accession to the EU is speeded up this will reverse the trend in the medium to long term.

The bottom line is that Turkey and Europe need each other economically (over 50% of Turkish exports go to the EU) and politically especially.

This development is highly positive for US geopolitically since a major ally in Turkey will now be pulled more into the West with greater integration and improved democratic values in the future.

It is important for trading/investment purposes not to look back but forward.  Yes, Turkey has slid in terms democracy but I expect things to improve in the future.

For domestic political considerations, this puts President Erdogan back in a good light and gives him an opening to re-establish his importance on the world stage.  Make no mistake, this is was probably an important consideration in getting the deal approved so quickly on the Turkish side.

Bottom Line:

Invest in Turkey for the medium to long term, but be careful in the short-term.   The big risk is that Turkey gets caught in an emerging market sell-off.  The likelihood of a rate rise in the US, which would trigger a sell-off, is now very low for 2015.  In fact, I don’t believe it will happen until 2016.