The European Union–Turkey: Economic Relationships

1. The European Union–Turkey:Economic Relationships Utku UTKULU, Assc. Prof. Dokuz Eylül University FEAS, Department of Economics Utku Utkulu&Aydın Arı

2. Plan Turkey in the Integration Process Institutions of the EU Customs Union Economic and Monetary Union (EMU) The enlarging EU The EU-Turkey: A Brief History The EU-Turkey: Glossary The EU-Turkey: Present Day Utku Utkulu&Aydın Arı

3. Turkey in the Integration Process • International Economic Integration • Liberalisation of the World Trade • Customs Union • European Union Utku Utkulu&Aydın Arı

4. International Economic Integration • Integration is a process in which it has to be taken some measures against discrimination between economic agents of the Nation-States volunteer to integrate. • The main goal is the liberalisation of trade in that area by putting away discrimination. • Integration differs from cooperation: • Cooperation aims at diminishing discrimination, • Integration aims at removing discrimination. Utku Utkulu&Aydın Arı

5. Measures for removal of discrimination • Removing of Tariffs and, Non-tariff barriers; • Accommodation of Taxes and, Monetary and fiscal policies; • Construction of joint policy and decision mechanism. Utku Utkulu&Aydın Arı

6. The main feature of Integration • Is the liberalisation of trade. • Another is the free movement of the production factors. • Further on geographical distance and transportation costs, the more important requirement is the removal of discrimination made by States over goods and services and, production factors movements. • Integration differs from - the liberalisation of the world trade, - the globalisation. Utku Utkulu&Aydın Arı

7. Types (or Stages) of Integration • Preferential Trade Agreement • Free Trade Area • Customs Union • Common Market • Economic and Monetary Union • Economic Integration • Political Integration Utku Utkulu&Aydın Arı

8. Liberalisation of the World Trade: • Is the main purpose of the New Economic Order after World War II. • Is based upon the General Agreement on Tariffs and Trade (GATT) which entered into force in 1948 and terminated on 1995. The number of the State signed GATT after Uruguay Round (1986-1994) is 125; one of them is Turkey. A Brief Description Of International Trade Agreements Utku Utkulu&Aydın Arı

9. GATT GATT set up a series of negotiating rounds intended to reduce and gradually eliminate quotas, duties, and tariffs. Important articles are: • Article I General Most-Favoured-Nation Treatment; • Article III National Treatment on Internal Taxation and Regulation; • Article XI General Elimination of Quantitative Restrictions; • Article XIII Non-discriminatory Administration of Quantitative Restrictions; • Article XVI Subsidies; • Article XX General Exceptions; Utku Utkulu&Aydın Arı

10. GATT mainly aimed at • No discrimination on trade, • Tariffs only for protection of National Economies against international competition • Equivalent concession • Mediation when commercial disagreement occurs • Measures against unfair competition World Trade Organization (WTO) substituted for GATT after 1995. www Utku Utkulu&Aydın Arı

11. Institutions of the EU • European Union • European Parliament • Council of the European Union • European Commission • Court of Justice • Court of Auditors • European Investment Bank • Economic and Social Committee • Committee of the Regions • European Ombudsman • Agencies of the European Union Utku Utkulu&Aydın Arı

12. Customs Union The Customs Union between Turkey and the EU has been in force since the beginning of 1996. It has completed its six years of implementation. It is more than a typical Customs Union, which foresees arrangements on areas including competition, state aids, technical legislation and intellectual property rights. Although it can be said that the Customs Union has been functioning well in general, there are also certain problems regarding trade.Most of the problems faced by exporters and importers both of Turkish and the EU origin concern technical regulation and testing requirements. www Utku Utkulu&Aydın Arı

13. Static Effects Trade creation Trade diversion Dynamic Effects Economies of scales externalities Increasing competition Technological progress Increasing investment Decreasing risk and uncertainty Increasing exchange reserves industrialisation Economic Effects of Customs Union Utku Utkulu&Aydın Arı

14. PX SA PC(1+t) PB PA İ H E L J F K G DA 0 Q3 Q1 Q2 Q4 QX

15. Long run average costs UOM1 C M4 M3 M2 M1 UOM2 D B 0 Q1 Q2 Q3 Q

16. Effects of the Customs Union(EU-Turkey) on • Balance of Payments • Export industry • SMEs • State aids (investment, export) • Agricultural sector • Fiscal balance • Productivity • On Competition Utku Utkulu&Aydın Arı

17. The consequences of CU • Turkey's share in EU's total exports was 2.3% in 1995 and 2.7% in 1999. • The same figure for imports was 1.7% in 1995 and 1.9% in 1999. • As one can see, Turkey's share both in term of import and exports in EU's trade developed positively and in equal manners. • As of 1999, Turkey is the EU's 7th biggest export destination (up from 9 in 1990) and 13th biggest exporter to the EU (up from 17 in 1990). This shows that both sides profited from the Customs union agreement. Utku Utkulu&Aydın Arı

18. The consequences of CU • For consumers the CU has brought better quality, cheaper products and more variety, because of increased competition in the Turkish market.Consumer protection will be increased as European technical norms are used. • Producers and industry also benefit from cheaper and higher quality inputs, as well as access to a stable and large export market. The existence of a large and stable export market proved its importance during the economic crisis of 1998, when Turkey's exports to major destinations other than the EU declined whereas the EU continued to be the principal export market for Turkey and offset some of the negative effects of the crisis: Utku Utkulu&Aydın Arı

19. The consequences of CU • EU share of Turkish exports up from 46,6% in 1997 to 50% in 1998 and 53,9% in 1999 whereas EU imports stayed stable at 51-52% over the same period. • Exports to non-OECD countries in the same period declined from 40,7% in 1997 to 37,1 in 1998 and 29,2% in 1999). Utku Utkulu&Aydın Arı

20. The consequences of CU • Almost half of Turkey's total trade is with the EU in general and this profile has not changed since the Customs Union has been in force. • The EU share in Turkey's exports was 51.2% in 1995 (a year before the entry into force of the CU) and this figure was 52.5% in 2000. • EU imports in Turkey's total imports were 47.2% in 1995 and 48.9% in 2000. • As one can see, the EU share has been stable and fluctuations are mainly due to the instability of the Turkish currency and the Turkish economy. Utku Utkulu&Aydın Arı

21. The consequences of CU • Before the Customs Union, in 1993, 1994 and 1995, the EU's share in Turkey's trade deficit stood at 44,56%, 44,15% and 41,09 %, respectively. • In 2000, this figure is at 45,15%. This shows that the Customs Union has not widened the trade deficit in relative terms. • Of course the total absolute trade deficit volume has increased, but this is due to the increase in overall trade and currency fluctuations. Utku Utkulu&Aydın Arı

22. The consequences of CU • Turkish exports to the EU in textiles and clothing reached in 2000 Euro 7,5 bn; this represents an increase of almost 1 bn over 1999 and of 72% over 1995 (4,3 bn Euro); this compares with an increase of total EU imports in the sector of only 54%. • The Turkish surplus in textiles and clothing reached euro 5,8 bn in 2000 - this is an increase of 65% over their surplus in 1995. The Turkish share of EU imports in this sector also increased, from 9,5% in 1995 to 10,8% in 2000. Utku Utkulu&Aydın Arı

23. Trade with

24. Economic and Monetary Union • An aspect of the European Union designed to integrate economic and monetary policies and establish a single currency (the euro). The EMU was created by the 1992 Maastricht Treaty and officially came into existence in 1999. The European Central Bank has control over monetary policy and the money supply for the EMU. • EMU not only mean free movement of citizens, goods and services, and capital but also fixed exchange rates of national currencies and a unique money (the Euro). • In order to reach those goals, joint monetary policy, accommodation of economic policy, specially for fiscal policies, are needed. www Utku Utkulu&Aydın Arı

25. Euro:a single currency forEurope • The euro is the name of the single European currency that was put into circulation on 1 January 2002. The symbol of the euro is €. • The euro has replaced the old national currencies in 12 European Union countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. • Having a single currency makes it easier to travel and to compare prices, and it provides a stable environment for European business, stimulating growth and competitiveness. Utku Utkulu&Aydın Arı

26. Obligations for EMU • Free movements of goods and services, capital and labour, • Joint tariffs, • Fixed exchange rate between national currencies, • Accommodation of economic and monetary policies, • Approached fiscal policies, as possible as, • Joint monetary policies against third countries, • One central bank: ECB. Utku Utkulu&Aydın Arı

27. For accession to EMU • Exact convertibility of all currencies of joining countries, • Complete liberalization of capital flows and, financial market integration, • Removal of margin to float of national currencies and irreversibly fixed exchange rates. Utku Utkulu&Aydın Arı

28. In case of a CU, participants remove tariffs to each other but apply joint tariffs to third trading partners. CU is a partial agreement which is a stage of the EMU. In the EMU, two features are very important: free movements of production factors and accommodation of economic and fiscal policies. The EMU discipline economic and fiscal policies of participant countries because it aimed at stability of those policies. In the EMU, one important aim is the fairly redistribution of income, so it is most favourable for low income countries. The EMU is a required stage for accession to EU. Customs Union & the EMU Utku Utkulu&Aydın Arı

29. Positive effects microeconomic Diminishing transaction costs Removal of exchange rate uncertainty macroeconomic Progress in inflation and interest rate Changing Union’s reserve policy Developing capital markets Negative effects 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 degrees Wealth loss for faster growing economies. Wealth loss due to the financing method of budgetary deficits. Effects of joining the EMU Utku Utkulu&Aydın Arı

30. Probable Effects of the EMU on Turkish Economy Why Turkey is going to be affected directly: • Turkey’s exports to the euro area 39%; imports from 43% • Tourists, foreign investment and workers’ devises are mainly from the euro area • There is a valid Customs Union Agreement with the EU. A great part of the accommodation is already maintained. Utku Utkulu&Aydın Arı

31. Indirect effects Those arising from intensive economic and trade relationship. Those positively affecting expectations in Turkey, such as falling interest rates, rising investment and faster growth rate in the euro area. Direct effects Euro shall bring Turkey some obligations, such as monetary and exchange rate policies. Euro’s share in Turkey’s reserves has been increased. Transactions with euro in external trade have been increased. Macroeconomic stability should be maintained as well as price stability. Costs of borrowing in terms of euro diminishes. Firms should take care of real competitive policies. Probable Effects of the EMU on Turkish Economy Utku Utkulu&Aydın Arı

32. Member States Germany Austria Belgium France Spain United Kingdom Ireland Italy The Netherlands Denmark Sweden Luxembourg Finland Portugal Greece New Member States Cyprus, Malta, Hungary, Poland, the Slovak Republic, Lithuania, Latvia, Estonia, the Czech Republic Slovenia Applicant Country Romania Bulgaria TURKEY The Enlarging EU Utku Utkulu&Aydın Arı

33. Enlargement:Looking back on history The Treaties of • Paris (1951), establishing the European Coal and Steel Community (ECSC), • Rome (1957), establishing the European Economic Community (EEC), • EURATOM, were signed by six founding members: Belgium, France, Germany, Italy, Luxembourg and the Netherlands. The EU then underwent four successive enlargements: • 1973 - Denmark, Ireland and the United Kingdom • 1981 – Greece • 1986 - Portugal and Spain • 1995 - Austria, Finland and Sweden Utku Utkulu&Aydın Arı

34. Copenhagen, 1993 • In June 1993, the Copenhagen European Council opened up the perspective of enlargement to include the countries of Central and Eastern Europe. • The Council laid down the foundations of the current enlargement process by declaring that "the associated countries in Central and Eastern Europe that so desire shall become members of the European Union” and by defining the membership conditions, the so-called Copenhagen criteria. Utku Utkulu&Aydın Arı

35. Under the Copenhagen criteria, membership requires thatthe candidate country ensures : "stability of institutions guaranteeing democracy, the rule of law, human rights and the respect for and protection of minorities”: the political criteria. Utku Utkulu&Aydın Arı

36. Since the entry into force of the Treaty of Amsterdam in May 1999, these requirements have been enshrined as constitutional principles in the Treaty on European Union, and have been emphasised in the Charter of Fundamental Rights of the European Union, that was proclaimed at the Nice European Council in December 2000. Utku Utkulu&Aydın Arı

37. “the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union” : the economic criteria. These criteria are consistent with the principles for economic policies as enshrined in the EC Treaty by the Maastricht Treaty that entered into force on 1 November 1993. Utku Utkulu&Aydın Arı

38. “ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union". This criterion refers to the implementation of the Union’s legislation, known as the acquis communautaire. For that reason, it is referred to thereafter as the acquis criterion. Subsequent European Councils, in particular the Madrid European Council in 1995, have highlighted the importance, not only of incorporating the acquis into national legislation, but also of ensuring its effective application through appropriate administrative and judicial structures. www Utku Utkulu&Aydın Arı

40. Economic Analyses of enlargement Numerous economic analyses have concluded that the benefits of enlargement outweigh the costs. Although the benefits are relatively larger for the acceding countries, because they start from a lower economic base (their economies represent only about 6% of the GDP of EU-15), there are gains for both sides. Moreover, the future members, already exposed to the challenge of globalisation, will help the Union to surmount it. Utku Utkulu&Aydın Arı

41. Enlargement is a‘positive-sum’ game A key academic study ("The Costs and Benefits of Eastern Enlargement", R. Baldwin, J.F. François and R. Portes, Economic Policy 24, 1997) by the Centre for Economic Policy Research estimated that accession of countries of Central and Eastern Europe would –even in a conservative scenario– bring an economic gain for the EU-15 of € 10 billion, and for the new members of € 23 billion. The latest analysis of business circles argues that there are ‘potentially huge economic and business benefits of taking applicant countries into the EU as soon as possible’. ("Opening up the Business Opportunities of EU Enlargement", European Round Table of Industrialists, May 2001. See also "Profiting from EU Enlargement", H. Grabbe, Centre for European Reform, June 2001.) Utku Utkulu&Aydın Arı

42. A recent study of the Commission estimates that enlargement could increase the growth of GDP of the acceding countries by between 1.3 and 2.1 percentage points annually, and for the existing members it could increase the level of GDP by 0.7 percentage point on a cumulative basis. ("The Economic Impact of Enlargement", a study by the Directorate General for Economic and Financial Affairs, May 2001) Utku Utkulu&Aydın Arı

43. Concerning the budgetary consequences of enlargement, the framework has already been decided by the European Council in Berlin, and includes a modest amount (less than 10%) for transfers to the Central and East European countries for the period up to 2006. In the longer term, after 2006, expenditure will depend on a series of decisions to be taken in the fields of cohesion policy, agricultural policy, etc. The increase in the budget resulting from enlargement will be a political rather than an economic issue. Utku Utkulu&Aydın Arı

44. There have been several analyses of the impact of enlargement on the labour market and migratory flows. One of them suggested that only about 335,000 people would move to the EU-15 countries from Central and Eastern Europe even if there were free movement of workers immediately on accession. In fact, the Union has now agreed on a flexible transition period of up to seven years for limiting the inflow of workers from new member states. Utku Utkulu&Aydın Arı

45. Costs of non-enlargement • Non-enlargement, or a delay in enlargement, would have costs both for the Union and for the applicant countries: • 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. • Without enlargement, the Union would be less able to combat the problems of organised crime, illegal immigration and terrorism. Utku Utkulu&Aydın Arı

46. The EU-Turkey: A Brief History • 31 July 1959 application for membership of the Community • 12 September 1963 Ankara Agreement, which came into force on 1 December 1964. The cornerstone of this agreement is the establishment of a customs union in three stages. A Financial Protocol accompanied this agreement. • A second and third Financial Protocol were signed in 1970 and 1977 respectively. The Ankara Agreement also set up an Association Council that meets regularly and discusses the work of the association. www Utku Utkulu&Aydın Arı

47. The EU-Turkey: A Brief History • On 14 April 1987 Turkey presented its application for membership of the Community. The Commission adopted its opinion on the application on 18 December 1989. • On 6 March 1995 the EC-Turkey Association Council decided to move onto the final stage of the customs union and resume financial cooperation. • On 13 December 1995 Parliament gave its assent to the customs union. • The Decision on the final phase of customs union came into force on 31 December 1995; on the institutional front, it set up a consultation body, the Customs Union Joint Committee. Utku Utkulu&Aydın Arı

48. Developments in the enlargement process • The Luxembourg European Council of December 1997 confirmed "Turkey's eligibility for accession to the European Union".As requested by the Luxembourg European Council, the Commission adopted on 4 March 1998 the initial operational proposals of the "European Strategy for Turkey“. • The European Council in Helsinki (December 1999) welcomed "recent positive developments in Turkey, as well as its intention to continue its reform towards complying with the Copenhagen criteria. Turkey is a candidate State on the basis of the same criteria as applied to the other candidate States.“ Utku Utkulu&Aydın Arı

49. Developments in the enlargement process • The Accession Partnership was formally adopted by the EU Council on 8 March 2001, is a roadmap of the priorities for Turkey in making progress towards meeting all the criteria for accession to the EU. • On the basis of this Accession Partnership Turkish Government has adopted on 19 March 2001 its National Programme for the Adoption of the Acquis. (NPAA)The programme provides a wide-ranging agenda of political and economic reform. Utku Utkulu&Aydın Arı

50. The Gothenburg European CouncilJune 2001 regarded the National Programme as a "welcome development" and "urged Turkey” at the same time to take concrete measures to implement the priorities of the Accession Partnership, which is the cornerstone of the pre-accession strategy. The decisions in Helsinki have brought Turkey closer to the EU and opened up new prospectsfor her European aspirations. However, "in a number of areas such as human rights, further progress is needed.”“The Council is invited to adopt thesingle financial framework for pre-accession assistance to Turkey by the end of the year at thelatest. The economic programme agreed with the IMF must be vigorously implemented tocreate the conditions for economic recovery.” Utku Utkulu&Aydın Arı