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What’s Next for Turkey?

What’s Next for Turkey?. Economic Aspects of Enlargement Brussels, 1 February 2005. Dirk VERBEKEN EUROPEAN COMMISSION Economic and Financial Affairs Directorate General. Setting the stage: Copenhagen requirements Council , June 1993.

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What’s Next for Turkey?

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  1. What’s Next for Turkey? Economic Aspects of Enlargement Brussels, 1 February 2005 Dirk VERBEKEN EUROPEAN COMMISSION Economic and Financial Affairs Directorate General

  2. Setting the stage:Copenhagen requirementsCouncil, June 1993 • Stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities • Existence of a functioning market economy • Capacity to cope with competitive pressure and market forces within the Union • Ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union • Constraints: absorption capacity of the EU

  3. The convergence challenge: Meeting Copenhagen accession criteria: • political convergence • legal convergence: adopting the EU acquis • economic convergence: ‘functioning market economy…’ and EU integration Nominal convergence: meeting Maastricht Real and structural convergence: catching-up to EU levels

  4. Institutional/legal convergence:Negotiation process • Start of negotiation process: • October 2005: screening • Economic Chapters: meet functioning market economy criterion • Negotiation open ended, “deliveries“ requested • Membership: around 2015

  5. Institutional/legal convergence:Open issues in negotiations • “Difficult chapters”: common agricultural policy, regional policy, budgetary provisions, free movement of persons, environment… • Aligning Turkish institutions will lead to dramatic modernization of society, comparable to 1920s

  6. Convergence to ‘functioning market economy’ and EU accession process • completing the reform agenda • Macroeconomic stability • Structural reforms: narrowing productivity differential and gap, financial intermediation, …decades of postponed structural reform in Turkey • Market institutions and regulations • meeting economic Copenhagen criteria • A question of track-record and keeping to reform path

  7. Economic Convergence: Reforms challenges(1) • Predictability, debt sustainability… • Privatization: long agenda but too little has happened • Sectoral shifts incomplete • Labour market need further improvements: education…participation • Financial intermediation too low…state banks • Better than New MS in market entry/exit - SMEs

  8. Economic convergence:Integration with EU(2) • Economic integration between the EU-25 and Turkey is well advanced through: • trade and investment flows • Institutional framework for bilateral relations between the EU and Turkey. • Customs Union: free trade in industrial products. • Progress to liberalise services and agriculture and for some approximation of EU economic legislation.

  9. Real convergence: catching-up to EU levels • The realissue and long-term goal • no EU Standard • higher average real growth than EU average • increasing the standard of living of the population • Income levels Turkey far below EU average • Population dynamics

  10. Average GDP per capita in PPS as a % of the EU

  11. Real convergence: prospects • Starting from from 28.5% in 2004: • Under an optimistic growth scenario, (average GDP growth 5.5%) the average GDP per capita (in PPS) would raise to 32.3% of the EU-25 average in 2014. • Reaching 75% of the EU-27 average will take decades!

  12. Nominal convergence:the Treaty route to EMU EMU: three phases EMU participation with derogation Pre-accession Euro zone EU accession Adoption of euro

  13. EMU & the adoption of the euro • Pre-accession Phase - • convergence to market economy - transition and EU accession process. • Pre-accession EMU acquis • Accession Phase • Member State with ‘a derogation from …’ • participating in EMU • progress towards nominal convergence • Final Phase: adoption of the euro

  14. Nominal convergence:EMU pre-accession phase • no direct public sector financing by central bank • no privileged access of public sector to financial markets • central bank independence and ... price stability objective • full orderly liberalisation of capital movements

  15. Nominal convergence: EMU’s Accession Phase • Member State with ‘a derogation from …’ • Participation in EMU’s multilateral surveillance and co-ordination procedures • Macro economic policy framework: • Fiscal policy • Monetary and exchange rate policy • Progress towards nominal convergence

  16. EMU’s Final Phase: adoption of the euro • compliance with the conditions for the adoption of the single currency, following the examination of the achievement of a high degree of sustainable convergence (art. 121) • The fulfillment of the Maastricht nominal convergence criteria will be the final key to adoption of the euro • When? The earliest 2017-2018 !!??

  17. Economic Policy Challenges in Turkey • safeguarding macroeconomic stability in the medium term. Macroeconomic stability is a precondition for successful financial sector reforms and stable financial sector development. • Sound development of the financial sector. deficiencies can hamper macroeconomic policies and can cause major damage to macroeconomic stability and growth.

  18. Financial sector challenges • The banking sector: Low financial intermediation

  19. Sectoral challenges: • The general business environment, in particular financial discipline and corporate governance of financial and non-financial enterprises. Unregistered economy • Intermediation and expansion of the financial sector into security markets and insurance, correcting mismatch in duration loans and deposits • Diversification away from agricultural sector, closure of the education gap

  20. Economic policy challenges for MS and the EU • Higher market competition - labour markets…. • Revisions to community policies: CAP & regional policy • multilateral surveillance & economic policy coordination - new focus? • Continuation of reform effort

  21. Conclusions • Turkey has made substantial economic progress but.. • Many aspects to convergence ... & real convergence a medium to long term phenomena under any growth scenario and • Growth can only be accelerated within limits • Institutional/acquis convergence is the key to success, the glue that will join Member States with different levels of economic development together into a functioning Community • Challenges to economic policy on both sides, absorption capacity (financial framework) • Enlargement is (likely) to happen!

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