Cablegate: Turkish Business: Eu Accession Talks Not Enough

Published: Wed 13 Oct 2004 06:01 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
SUBJECT: Turkish Business: EU Accession Talks Not Enough
1. (SBU) Summary. Strong advocates of EU membership,
leaders of Turkey's business community see accession
negotiations as another step in a long, arduous process
of economic and political change that will eventually
make Turkey a more "normal" country. In contrast to
their political counterparts, business leaders welcome
the conditional, iterative nature of the likely accession
process, hoping it will help keep Turkey on the reform
track. They do not think the start of accession talks
will by itself result in large amounts of new foreign
direct investment. End Summary.
2. (SBU) Turkey's business community welcomed the
October 6 European Commission report recommending the
start of EU accession negotiations as another step toward
normalcy for a country plagued for decades by political
and economic volatility. Understanding that the
accession process will be long and often bumpy, business
leaders say they value the very process as a way of
locking-in and ensuring the continuation of economic and
political reforms begun since the 2001 financial crisis
and the 2002 ascendancy of the AK Party. As strong
supporters of EU membership, business groups will now
help the government lobby EU members for a favorable
decision in December. A number of groups are now jetting
off to European capitals, including to join Prime
Minister Erdogan in business events in Berlin and Paris
this month.
A More Distant Horizon
3. (SBU) The CEO of the largest "holding" group of
companies told us the start of accession talks would
immediately lengthen his companies' planning horizon,
allowing the group the "visibility" to make longer-term
investment and employment decisions in Turkey. He said
the group, which has invested heavily in Russia and
Eastern Europe as well as in export projects in Turkey,
would likely relax its current internal rule that
requires 50% of all revenues be generated from outside
Turkey. Top bankers similarly expected an EU negotiation
process to help lengthen credit maturities, facilitating
innovations like the introduction of a home mortgage
market and a corporate bond market.
Keeping the State on a "Short Leash"
4. (SBU) But in contrast to politicians and many in the
media (see reftel), several business people told us they
welcome the reservations and cautions in the October 6
report, as well as the iterative, "conditional" nature of
the likely accession process. Consistent with the view
that it is the process more than the endpoint that
counts, the CEO of another leading group said he hoped EU
talks would keep both politicians and the military "on a
short leash." In a sense, the longer the process takes
and the more conditions that must be met, the better, he
thought. Similarly, businesspeople are not concerned
about the actual date EU ministers will set in December
for the start of negotiations.
New FDI Will be Slow in Coming
5. (SBU) Markets seemed to agree with business
interlocutors that the import of the start of an EC
process was for the long end of investors' portfolios.
Although Turkey-watchers around the globe were glued to
their Reuters screens, short-term money and currency
markets, which had priced-in a positive EC recommendation
for some months, did not react to the October 6 news.
The Istanbul stock market index of thirty corporate blue-
chips, however, enjoyed a strong day with a 3.3%
increase. The index is now up 21% since January 1.
6. (SBU) Business leaders are skeptical that a December
green light for EU negotiations will trigger a flood of
new foreign direct investment as Turkey becomes a
"convergence country." An official of TUSIAD, the big
business organization, told us he expected an increase of
corporate "exploratory missions" from EU countries. But
he thought such visits would not lead to much new
investment since existing investment impediments, notably
lack of confidence in the rule of law and the fairness of
regulation, will not go away once accession talks begin.
The Foreign Direct Investment Association of Turkey
(YASED) also stated in public remarks that unless the
investment climate improved in Turkey, a date would not
have a significant impact on the FDI flow into Turkey.
7. (SBU) In Ankara, a senior Treasury bureaucrat
responsible for investment echoed this view. He noted
the uptick in FDI inflows this year, but thought that the
success of ongoing negotiations with the IMF on a new
three-year macroeconomic policy framework was far more
important to new investors than was the prospect of EU
membership ten or more years in the future. An IMF-
provided "policy anchor" would help convince investors of
the sustainability of today's good monetary and fiscal
policies, giving investors the confidence he still felt
they lacked. Along with judicial reform, he thought that
over time such confidence would bring in the large FDI
flows that other EU accession countries enjoyed.
8. (SBU) An EU Mission official agreed, noting as well
that "structural and cohesion" financial aid from the EU
would take time to materialize and would not be very
large in relation to the size of Turkey's economy.
Furthermore, transposing into legislation and
implementing 90,000 pages of EU "acquis" will be an
arduous task that will likely have more downs than ups.
The AKP: A Learning Organization?
9. (SBU) The business community's views on EU accession
reflect an opinion that after two years in power, the AK
Party has yet to earn business' trust, especially that of
Istanbul's corporate elite. Business leaders believe the
AK government has only made economically sensible policy
decisions after going to the brink and being pushed back
by markets or external forces like the IMF. The recent
adultery controversy and the dispute this spring over the
status of religious "Imam Hatip" schools are frequently
cited evidence that the AK Party has failed to learn from
the success of policies that have stabilized the currency
and generated domestic investment and growth. A more
recent flap is over a government-draft of a new banking
law that essentially ignored the industry's input in
favor of a top-down, coercive approach to regulation (see
septel). Left to its own devices, businesspeople fear,
"Ankara" would quickly revert to the populist habits that
have been the downfall of so many governments.
Comment: Keeping the Focus on Reforms
10. (SBU) The business world's realism is well-
grounded: EU accession talks are not a magic pill, but
an anchor that -- along with a continued IMF role -- will
help ensure the continuity of reforms over time. To
business people, definitively breaking out of Turkey's
boom-bust cycles requires continued progress in creating
political predictability, as well as follow-through on
privatization and the tax, social security, banking, and
regulatory and legal reforms. U.S. (and EU) support for
a strong IMF program will help preserve the current
economic momentum, as will continued work to solve long-
festering business disputes and create a framework for
expanding U.S.-Turkey trade and investment. We will
continue to urge the Turks to set a date for TIFA Council
discussions and look forward to upcoming visits by senior
U.S. economic officials. Post will also keep a public
affairs focus on a better investment and business climate
as the key to Turkey's long-term prosperity.
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