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Economist Heiner Flassbeck and Political Analyst Ekrem Ekici say Turkey’s economic crisis runs deeper than U.S. sanctions

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DIMITRI LASCARIS: This is Dimitri Lascaris, reporting for The Real News Network from Montreal, Canada.

Two years after the coup attempt against President Erdogan and a year after the referendum which granted him extensive powers, Turkey is far from stability. The U.S. is demanding that Turkey release Pastor Andrew Brunson, an evangelical Presbyterian missionary who was arrested in 2016 for alleged ties to terrorist organizations and espionage related to the 2016 coup attempt. The Trump administration has levied sanctions on Turkey to put pressure on Erdogan. As the Turkish currency, the lira, plummets in value to less than half of what it was worth last year, people in Turkey hold various opinions on the causes of the crisis and the right way forward.

Here to discuss this with us are Dr. Heiner Flassbeck and Ekrem Ekici. Dr. Flassbeck is a former member of the German Council of Economic Experts. He worked for the German Federal Ministry of Economics, the German Institute of Economic Research, and the German Ministry of Finance before moving to UNCTAD, where he became director of the division on globalization and development strategies. He joins us today from Geneva. Ekrem Ekici is an independent researcher and political analyst. He is co-editor of a new online magazine called Rupture, which you can find at He joins us today from Berlin. Thank you very much for joining us today, gentlemen.

HEINER FLASSBECK: Thanks for having us.

DIMITRI LASCARIS: So let’s start with you, Ekrem. This economic crisis; would you, in your view, say that it is essentially the result of U.S. tariffs, or did it start sooner? And if so, what do you view as the root causes of the crisis?

EKREM EKICI: Well, it’s a result of many different factors. But of course, as you said, the main reason is [stuck between the road] between the United States and Turkey, which is mainly going around this incarceration of the pastor Mr. Bronson. And the United States demands immediate release of the pastor; otherwise, they say they will keep on implementing sanctions against Turkey, which they do. As you have seen, Donald Trump doubled the tariffs on iron and steel imports from Turkey, which is a very important sanction for Turkish economy, because the United States is one of, amongst the most important buyers of iron and steel.

So yes, of course everybody is saying this financial crisis is a source of, main source of this financial crisis as the declining relations between Turkey and the United States. However, however, if we take a step back we can see that the real roots of this financial crisis can be traced to the structure of Turkish economy which was dependent on foreign direct investment in the last 15 years.

DIMITRI LASCARIS: And now to you, Dr. Flassbeck. Erdogan has already said that he has no intention of honoring U.S. sanctions on Iran. He’s also talked about developing other alliances. In your view, might the U.S. sanctions pushed Turkey further away from the U.S. sphere of influence and into stronger ties with Russia, Iran, and China?

HEINER FLASSBECK: That’s possible. But let me first say a word on the causes of the crisis here. I disagree slightly with my predecessor. What you see in Turkey is a currency crisis; a currency crisis as we have seen many, many before. It’s a crisis driven by speculation first in one direction. And in the direction of Turkey. People were heavily invested in emerging markets, including Turkey. So then we see the traditional, usual overshooting of the market. So a lot of money, short-term money is flowing in, hot money is flowing into the country. And then at a certain point, and here comes the sanctions and the tensions between the United States and Turkey, all the money is flowing out. All the short-term money. Which is not really important for the economy of Turkey, the short-term money, but it has driven the currency to a totally unreasonable level, first in appreciation, and now it’s driving the currency to a totally unreasonable level down.

And this creates big trouble, because people are indebted in dollars to many people, as we have seen also before in Iceland and Hungary, elsewhere. A lot of people in the country, obviously companies included, are indebted in dollars. And then you have really a problem, because you should not care about this hot money, these investment funds, hedge funds that are going in and out, but your real people. Companies are heavily hit by this storm on the currency market.

DIMITRI LASCARIS: Well, considering that that is the nature of the crisis from an economic perspective, is there, is strengthening of ties between Turkey and other major powers such as Russia and China a potential way out of this crisis? Or is that is that something that simply would constitute a political consequence of the sanctions, but wouldn’t really address the underlying problems that are currently bedevilig the Turkish economy?

HEINER FLASSBECK: No, this is the traditional way to try to calm down the markets. Talking to China, I’m talking to Russia. I think that will not. Will not work, in effect. What will work, what would work is to increase interest rates which is a traditional way to do it. I do not recommend it, but it’s a traditional way. If you increase interest rates to enormous levels, then at a certain point the speculation will stop. But this, as Erdogan rightly says, will have very negative consequences for the economy, depending on how long these interest rates will be high. If it’s only for a couple of days, it’s not too bad.

So what has to be done? Well, Erdogan and his government has to show that they’re able to contain inflation in the medium term. And the question is how do they do it? And in addition, now they have to show that they are able and willing to help their companies and their private households in this disastrous situation with the depreciated currency, with the depreciated lira.

DIMITRI LASCARIS: Ekrem, sanctions which the U.S. levied on Iraq in the 1990s and on Iran subsequently were supposedly intended to persuade the people of those countries to oppose the existing governments, with the hope that they would eventually overthrow them. It didn’t work in Iraq. It certainly hasn’t worked to date in Iran. In your view, might these sanctions have that effect in Turkey? Are there are signs that Erdogan’s popularity has been undermined by the sanctions?

EKREM EKICI: Well, it doesn’t also seem to- it doesn’t also seem that it’s going to work in Turkey, as well, because no one is responding to the sanctions. And all those practices coming from the United States in his usual way to consolidate his support, and he’s successful so far.

For example, today he went as far as saying that we should boycott the American electronic products, and it immediately started a movement in Turkey. So for example, today it seems that the hike in the value of dollar against Turkish lira is declining, because the local individuals and companies switched to Turkish liras from the dollars. This is, this a littel bit curbed the hike in the, the hike of the value against the hike of the value of American dollars against Turkish lira. So for now it doesn’t seem so. However, today the Turkish Industry and Business Association and the union of chambers and stock exchanges of Turkey has released a joint statement, calling on governments to cut the spendings and reinstate the relations with the EU and United States to reestablish the stability in Turkish economy.

So we can say that there is a growing pressure on Erdogan’s government by the business circle to normalize relations, normalize the foreign relations, especially with United States and European Union. However, this wouldn’t lead to popular unrest, I wouldn’t say that. Not at this stage, at least.

DIMITRI LASCARIS: You know, the nature of the economic crisis, the means by which it might be brought under control, is it not also the case that there are benefits to the sharp devaluation of the lira? Or are the economic consequences essentially all bad for the people of Turkey?

HEINER FLASSBECK: No, no. Surely in the medium term, in a couple of months, the depreciation will show up in rising exports and falling imports. And that is exactly what is needed. A symptom of the crisis was a huge current account deficit in Turkey that will be reduced dramatically in my view in a couple of months or a year or so. And so far that will help the Turkish economy, in the end. Everybody will praise President Erdogan for his wisdom, which is a normal reaction of the markets, so to say.

But the point is, as I said, is how he will handle this, this crisis of the foreign foreign currency loans. And this is a critical thing. We have seen in Hungary, there was one government was toppled over this because people were so mad about the whole situation. Because imagine your mortgage will double in a couple of days because of the currency, your own currency, falling. And we have seen in Hungary a new government, a right-wing government, that of Mr. Orban, had a lot of fighting over years, over many years, to calm this crisis down. And here it all depends on the, on the economic policy decisions that Erdogan is taking, where he has to again go to the IMF, what I think he will not do, because the IMF is in- everybody knows Washington’s very influential in the IMF. But he could go to the IMF. They would prescribe the traditional neoliberal austerity measures which do not really work. But combined with the depreciation, sooner or later the problem is solved. The only thing the IMF can help them is to stop the fall of the currency, because he can ask for a dollar loan.

The other way to do it would be a bit more unconventional. You should try to convince people outside the country that in the medium term over a couple of years he’s able to contain inflation. This was the main, the most important thing. And with that, with the high inflation to reduce the very high interest rate over the medium term. And this could be done, if he would be reasonable, would be not too orthodox. But I think he is orthodox. If he were to be not orthodox, he would think about the kind of incomes policy; namely, inflation is always a question of wages overshooting productivity. So he could go to the negotiating partners there and try to form a contract of the medium term. That would all be much more important than all the measures that are taken now, or the declaration that you have of exchanging dollars back into lira. So this is all not really what will happen.

DIMITRI LASCARIS: Ekrem, let’s finish up with you. I want to talk a little bit about NATO. Turkey, of course, is a member of NATO. And its ties with other NATO states, not just to the United States but major powers in Europe, have become increasingly strained over the years. Is there any talk, credible talk in Turkey about withdrawing from NATO? Is that even a subject of serious conversation in the political and policy spheres? Or do you think that’s really something that’s beyond the realm of what is realistically possible, a Turkish withdrawal from NATO?

EKREM EKICI: Well, I would say no, not at the moment. At least not at the moment. But this was a hot topic when when there was the Afrin campaign of the Turkish army, I mean that Turkey, Turkey had the crisis especially again with the United States, which also has connections to this financial crisis under U.S. sanctions against Turkey. Because there’s a there’s a growing disagreement between the United States and Turkey, especially on the issue of the northern Syria question.

So there was a talk back then in the beginning of the year, because Turkey and the United States were confronted in terms of what to do with the Syrian Kurds in northern Syria. However, now the debate is revolving around mainly economic issues, and NATO is not a part of it. It’s rather about their relations with the United States. Now Erdogan is pushing the, pushing the notion of an economic war. He says the United States declared an economic war against Turkey, and we will not bow down. And we will do what it takes to protect our national interests, and we will show that we don’t take orders. So this is rather between Turkey and United States, rather than questioning Turkey’s membership in NATO. Not at this time.

DIMITRI LASCARIS: Well, we’ve been speaking to Dr. Heiner Flassbeck and Ekrem Ekici about the economic crisis in Turkey. Thank you very much for joining us today, gentlemen.

HEINER FLASSBECK: Thank you for having us.

DIMITRI LASCARIS: And this is Dimitri Lascaris for The Real News Network.

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Dr. Heiner Flassbeck graduated in April 1976 in economics from Saarland University, Germany,
concentrating on money and credit, business cycle theory and general philosophy of
science; obtained a Ph.D. in Economics from the Free University, Berlin, Germany in
July 1987. 2005 he was appointed honorary professor at the University of Hamburg.

Employment started at the German Council of Economic Experts, Wiesbaden
between 1976 and 1980, followed by the Federal Ministry of Economics, Bonn until
January 1986; chief macroeconomist in the German Institute for Economic Research
(DIW) in Berlin between 1988 and 1998, and State Secretary (Vice Minister) from
October 1998 to April 1999 at the Federal Ministry of Finance, Bonn, responsible for
international affairs, the EU and IMF.

Worked at UNCTAD since 2000; from 2003 to December 2012 he was Director
of the Division on Globalisation and Development Strategies. He was the principal
author of the team preparing UNCTAD's Trade and Development Report, with
specialization in macroeconomics, exchange rate policies, and international finance.
Since January 2013 he is Director of Flassbeck-Economics, a consultancy for global
macroeconomic questions ( Co-authored ACT NOW! The Global Manifesto for Economic Policy published in 2013 in Germany.