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ECONOMIC SCENARIOS FOR THE EU: Turkish perspective

This study examines economic integration, the European Monetary Union, and Turkey's experience with EU integration. It evaluates different economic scenarios for 2020 and their implications for enlargement decisions.

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ECONOMIC SCENARIOS FOR THE EU: Turkish perspective

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  1. ECONOMIC SCENARIOS FOR THE EU: Turkish perspective Tankut Kurtay Enise Elif Çetin Nihat Çelik Ruziye Gülce Canbazoğlu Melis Tetik Supervisors Prof. Utku Utkulu Assoc. Prof. Oğul Zengingönül 8th Semester Students at the Faculty of Economic and Administrative Sciences Dokuz Eylül University, İZMİR, 2006

  2. Plan • Introduction • Theoretical Background • European Monetary Union • Turkiye’s Integration to the EU • Economic Scenarios for 2020 • Conclusion

  3. 1. Introduction Aims: Presenting an overview of the main aspects of economic integration, the EMU and the Turkish experience. Evaluation of different economic scenarios in 2020 and possibility of using this information to decide on enlargement. Methodology: Descriptive work

  4. 2. TheoreticalBackground 2.1 Types/Classification of Economic Integration 2.2 Economic Effects of Economic Integration 2.3 Factors Jeopardizing the Potential Benefits of Integration 2.4 Enlargement 2. THEORETICAL BACKGROUND

  5. 2.1 Types/Classification of Economic Integrations • Free Trade Area Two or more countries form a free trade area when they abolish all import duties ontheirmutual trade in all goods but retain their original tariffs against the rest of the world. • Customs Union The groups of countries that members abolish all import duties on their mutual trade in allgoods and adopt common tariffs to the third countries. 2. 1. TYPES/CLASSIFICATION OF ECONOMIC INTEGRATIONS

  6. Common Market If two or more countries form a common market, they form a customs union and, inaddition, allow free movement of all factors of production among the member countries. • Economic / Monetary Union If two or more countries form an economic union, they form a common market and, in addition, proceed to unify their fiscal, monetary and socio-economic policies (joint policy decision). 2. 1. TYPES/CLASSIFICATION OF ECONOMIC INTEGRATIONS

  7. 2.2 Economic Effects of Integration:The Case of Customs Union • Static effects2. Dynamic effects Production Effects *Trade creation * Economies of scale *Trade diversion * Externalities Consumption Effects * Industrialisation Terms of Trade Effects * Increasing competition * Technological progress * Increasing investment * Decreasing risk and uncertainity 2. 1. ECONOMIC EFFECTS OF ECONOMIC INTEGRATION

  8. 2.2 Economic Effects of Integration:The Case of Monetary UnionThere are two main requirements of a monetary union:1. Joint monetary policy2. Establishing a single currency i.e. Joint exchange rate policy 2. 2. ECONOMIC EFFECTS OF ECONOMIC INTEGRATION

  9. Potential positive effects of a Monetary Union (Benefits) • Diminishing transaction costs. • Removal of exchange rate uncertainity • Progress in reducing inflation and interest rate • Increase on investment and employment • Change in Union’s reserve policy • Developing capital markets • The fair redistribution of income. • The negative effects of speculation on exchange rates reduces • The need to find reserve will reduce because of the foreign trade between the member countries • Price stability • Economic stability and growth 2. 2. ECONOMIC EFFECTS OF ECONOMIC INTEGRATION

  10. Potential negative effects of a Monetary Union (Costs) • The member countries will lose their economic policy freedom. • Adjustment problems of member countries in face of demand shocks • Alternative choice of inflation-unemployment trade-off for separate country can cause inequality among policy results. • Nominal wage increases depending upon labour markets centralisation degress • Loss in seigniorage revenues • The transfer of the funds from rich countries to developing countries will effect the rich countries negatively 2. 2. ECONOMIC EFFECTS OF ECONOMIC INTEGRATION

  11. Benefits of Monetary Union Costs of Monetary Union Benefits Costs The integration level with the member states The integration level with the member states Figure 1.-The curve of benefits Figure 2.-The curve of costs Comparison of Costs and Benefits of a Monetary Union 2. 2. ECONOMIC EFFECTS OF ECONOMIC INTEGRATION

  12. The Cost and Benefits of Monetary Union Benefits Benefits‹Costs Benefits›Costs Costs E The integration level with the member Figure 3.-The Integration to the Monetary Union.

  13. 2.3 Factors Jeopardizing the Potential Benefits of Integration ► The occurance of asymmetric shocks that endangers the stability of the Monetary Union. ►The mobility of the production factors are very important for the Union.The non-mobility of them will endanger the future of the EMU. ►Adjustment problems of member countries in face of demand shocks. ►The rigidityof price and wages will jeopardize the benefits of integration. ► The differences of prices and inflation ratios will reduce the impact of the economy policies and will cause to unstability in economy. 2. 2. FACTORS JEOPARDIZING THE POTENTIAL BENEFITS OF INTEGRATION

  14. ► The openness of a country to foreign trade ,and its trade relations with the other member countries is very important. ►If the financial integration level among the member countries is not high. The lack of harmony in economy policies among the members. ►Alternative choice of inflation-unemployment trade-off for separate country can cause inequality among policy results. ►If there is no variability in export,it is hard to cope with sectoral shocks. 2. 2. FACTORS JEOPARDIZING THE POTENTIAL BENEFITS OF INTEGRATION

  15. 2.4 Enlargement The EU has already had a successful enlarging past. Treaty Establishing the European Coal and Steel Community (Treaty of Paris 1951) with Treaty Establishing the European Economic Community and the European Atomic Energy Community (Treaty of Rome1957) has signed by the six founder members: Belgium, France, Germany, Italy, Luxemburg and Holland. 2. 4. ENLARGEMENT

  16. After this EU has passed along five enlargement process: • 1973 Denmark, Ireland and The United Kingdom • 1981 Greece • 1986 Portugal and Spain • 1995 Austria, Finland and Sweden • 2004 Cyprus, The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. 2. 4. ENLARGEMENT

  17. Advantages of Enlargement • Economic growth. • Stability • Global Presence. • Business Confidence. • Foreign Direct Investment (FDI). • Structural Funds. 2. 4. ENLARGEMENT

  18. Disadvantages of Enlargement • Migration (Though some countries’ stories do not confirm this !). • Common Agricultural Policy. • Regional Aid. • EU Standarts and Systems. 2. 4. ENLARGEMENT

  19. Cost of Non-Enlargement • Delay in enlarging the single market, and lower economic growth in the applicant countries, would deprive member states of economic benefits. • For the applicant countries failure to join the Union would weaken the incentive for economic reform, discourage foreign investment and reduce economic growth. • It could thus create political instability in Europe, and even undermine the process of democratisation, with potential repercussions for the Union. 2. 4. ENLARGEMENT

  20. Without enlargement, the Union would be less able to combat the problems of organised crime, illegal immigration and terrorism. • Disillusion with the Union in the applicant countries would feed Euroscepticism in the member states. 2. 4. ENLARGEMENT

  21. 3. The European Monetary Union (EMU) 3.1 Major steps towards Economic and Monetary Union 3.2 Today & Future 3.3 Common Exchange Rate Policy and EURO “as reserve money” 3.4 Common Monetary Policy in the EURO Area 3.5 Fiscal Policy in the EU 3.6 Financial Integration and Financial Markets 3.7. Enlargement and Its Effects on the EMU 3.8 Some Potentially Important Concerns

  22. 3.1 Major steps towards the EMU • October 1970 Report of the Werner Committee published • March 1971 Council of Ministers endorses EMU by 1980 and March 1972 European ‘snake in the tunnel’ • July 1978 European Council endorses plan for EMS and March 1979 Start of EMS • February 1986 Signing of Single European Act • June 1988 Delors Committee established by European Council and April 1989 Report of the Delors Committee published 3.1 MAJOR STEPS TOWARDS THE EMU

  23. June 1989 European Council decides about start of stage I of EMU and July 1990 Stage I of EMU begins October 1990 European Council decides on start of stage II of EMU December 1990 Start of intergovernmental conferences on EMU and political union December 1991 European Council adopts Treaty on European Union June 1992 First referendum in Denmark rejects Maastricht Treaty 3.1 MAJOR STEPS TOWARDS THE EMU

  24. August 1992 Crisis in Exchange Rate Mechanism (ERM) beginsand September 1992 Referendum in Franceapproves Maastricht Treaty May 1993 and Denmark approves Maastricht TreatyandNovember 1993 Maastricht Treaty enters into force January 1994 Start of stage II of EMU; European Monetary Institute established December 1995 European Council decides that the name of new currency will be euro 3.1 MAJOR STEPS TOWARDS ECONOMIC AND MONETARY UNION

  25. June 1997 Adoption of Stability and Growth Pact and Decision about ERM II May 1998 European Council decides about membership of EMU, Decision about bilateral central rates of the EMU currencies, Executive Board of ECB appointed and June 1998 Establishment of ECB January 1999 Start of stage III of EMU; decision on euro rates January 2002 Distribution of euro coins and banknotes starts 3.1 MAJOR STEPS TOWARDS ECONOMIC AND MONETARY UNION

  26. 3.2 Today & Future • The euro is the official currency of twelve European Union member states • EU member states are eligible to join if they comply with certain monetary requirements. • The euro is managed and administered by the European System of Central Banks • Denmark, Sweden and the United Kingdom were the only EU member states outside the monetary union. 3.2. TODAY & FUTURE

  27. In 2004 the 10 new EU member states had a currency other than the euro 1 January 2007 for Estonia, Slovenia and Lithuania. 1 January 2008 for Cyprus, Latvia and Malta 1 January 2009 for Slovakia Mid-January 2009 for Bulgaria 1 January 2010 for the Czech Republic and Hungary. 2011 or later for Poland and Romania 3.2. TODAY & FUTURE

  28. 3.3 Common Exchange Rate Policy and EURO “as reserve money” • Features of the ERM • Phases of the ERM; • A turbulent start, 1979-1983 • A calmer intermediate phase, 1983-1987 • No realignments, 1987-1992 • Crises, 1992-1993 • Tranquility restored, 1993-1998 • ERM II 1999 • Current situation of ERM 3.3. COMMON EXCHANGE RATE POLICY AND EURO “AS RESERVE MONEY”

  29. 3.4 Common Monetary Policy in the EURO Area • The ECB is one of the world's largest central banks, being in charge monetary policy for the European Union • Objectives of ECB; • Maintain price stability in the euro area (primary objective) Protecting the purchasing power of the euro • Support the general economic policies in the European Community (but without prejudice to the primary objective) 3. 4. COMMON MONETARY POLICY IN THE EURO AREA

  30. 3.5 Fiscal Policy in the EU • No central fiscal authority • Very small central budget; about 1% of GDP and only 2.5% of national budgets • No independent revenue raising capacity • Limited inter-regional redistribution; no inter-personal redistribution • The Stability and Growth Pact conduct of fiscal policyand it is based on Articles 99 and 104 of the European Community Treaty 3. 5. FISCAL POLICY IN THE EU

  31. Revenues of budget: custom duties agricultural levies (taxes on agricultural imports and levies on sugar production) a share of the VAT A share of GNP Spending of budget: CAP Structural and cohesion funds Other expenses 3. 5. FISCAL POLICY IN THE EU

  32. Table 3.1 Financial perspective of the European Union,2000-2006 (ml euro, 1999 prices)

  33. Stability and growth pact (SGP) • Fiscal discipline would be maintained and enforced in the EMU by SGP • Two issues concerning the Stability and Growth Pact (SGP). • balance the budget • Flexibility • Criteria of SGP • an annual budget deficit no higher than 3% of GDP • a public debt lower than 60% of GDP or approaching that value 3.5FISCAL POLICY IN THE EU

  34. 3.6 Financial Integration and Financial Markets • Financial market integration in the EU has started of the EMS in March 1979 • Three widely accepted interrelated benefits of financial integration: • risk sharing • Improved capital allocation • Economic growth • Financial integration represented an extremely ambitious programmed for economic change in the EU. It also cause some technical difficulties 3. 6. FINANCIAL INTEGRATION AND FINANCIAL MARKETS

  35. 3.7. Enlargement and Its Effects on the EMU • The enlarged European Union grew by 10 countries from 15 to 25 • 10 New Member States increased absolute EU GDP only by 5 percent. • EU-25 GDP amounts to 9,715 billion. • The New Member States countries measured at current prices their GDP per capita amounts only to 24 percent of EU-15 GDP per capita. • EU-25 per capita GDP decreases to 21,232 Euro 3. 7. ENLARGEMENT AND ITS EFFECTS ON THE EMU

  36. 3.8 Some Potentially Important Concerns • What are the costs and benefits of monetary union? • Benefits of EMU; • Lower transaction costs • Reduction of exchange rate volatility and uncertainty • More price transparency • A better functioning internal market. 3. 8. SOME POTENTIALLY IMPORTANT CONCERNS

  37. Costs of EMU; loss of an instrument of economic policy, start to fix exchange rate mechanism asymmetric shocks Immobility of labour 3. 8. SOME POTENTIALLY IMPORTANT CONCERNS

  38. Divergence (asymmetric shocks) Figure 3.1 the costs and benefits of a monetary union costs> benefits benefits> costs Flexibility of labour market 3. 8. SOME POTENTIALLY IMPORTANT CONCERNS

  39. Divergence (asymmetric shocks) Krugman view Commission view economic and monetary integration Fig.3.2 Two views on the relationship between economic and monetary integration and divergence 3. 8. SOME POTENTIALLY IMPORTANT CONCERNS

  40. What Is an Optimum Currency Area? • It is a region where it is best (optimal) to have a single currency. • Optimality depends on degree of economic integration: • Trade in goods and services • Factor mobility • Optimum currency areas are groups of regions with economies closely linked by trade in goods and services and by factor mobility, where the exchange rates are fixed among the members. 3. 8. SOME POTENTIALLY IMPORTANT CONCERNS

  41. Figure 3.3:Intra-EU Trade as a Percent of EU GDP 3. 8. SOME POTENTIALLY IMPORTANT CONCERNS

  42. IS EUROPE AN OPTIMUM CURRENCY AREA? • Most EU members export from 10 to 20 percent of their output to other EU members. This is relatively small. • Differences in culture and language discourage labor mobility. • Regional differences in labor and capital endowments make the adjustment process different in each region. • Practice of fiscal federalism is limited in scale. 3. 8. SOME POTENTIALLY IMPORTANT CONCERNS

  43. 4. Turkey’s Integration to the European Union Contents 4.1 Historical Background of Relations with the West 4.2. Beginning of the Integration 4.3. Turkey as a Negotiating Country 4.4. Integration of Turkey to the EMU

  44. 4.1 Historical Background of Relations with the West

  45. The Ottoman Empire, no less, was a European state. Ottoman rule of over one-third of Europe for four hundred years transformed the Empire from an originally Asian one into a Eurasian one. In the 19th Century, the Ottoman state • centralized power over and against local feudal notables, • promoted a more secular public life, • Adopted cultural attitudes shared by Western Europe. 4.1. HISTORICAL BACKGROUND OF RELATIONS WITH THE WEST

  46. The modern Turkish Republic is founded in 1923 and under the leadership of Kemal Atatürk, based on the contemporary system of values in all spheres of social life-reforms which enabled the Turkish nation to participate in the system of values shared by the European family of nations. 4.1. HISTORICAL BACKGROUND OF RELATIONS WITH THE WEST

  47. Atatürk’s will for a modern Turkey could be understood from this speech: “Turks have always gone towards the West. We want a European Turkey, in other words a Turkish country that looks towards the West. We want to modernize our country. All our efforts are aimed at founding modern Westernized government” 4.1. HISTORICAL BACKGROUND OF RELATIONS WITH THE WEST

  48. 4.2 Beginning of Integration

  49. In 1950s, Turkey was a member of the United Nations, The Council of Europe, NATO, the OECD and an associate member of Western European Union. • In the 31th of July 1959, Turkey applied to EEC for membership. The result of the negotiations was the signature of the “Ankara Agreement” on 12 September 1963. 4. 2. BEGINNING OF INTEGRATION

  50. The Ankara Agreement envisaged the progressive establishment of a Customs Union. • In the meantime, the EEC would offer financial assistance to Turkey. • EEC's share in Turkish imports rose from 29% in 1963 to 42% in 1972. 4. 2. BEGINNING OF INTEGRATION

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