Turkish economy falls far behind EU economic criteria

Vying to become a member of the world's most elite club of nations, the European Union, Turkey failed in 2007 to meet the necessary economic criteria for eligibility to join the EU.

Turkey was able to fulfill only half of the Maastricht criteria, which require health in several basic economic performance indicators. While performing even beyond EU standards in public sector borrowing requirements (PSBR) and total public debt stock, Turkey remained much lower than the expected thresholds in long-term interest rates and inflation.

According to a report prepared recently by the General Directorate of EU Affairs, a subdivision of the State Planning Organization (DPT), titled "Economic Developments in EU Member and Candidate Countries," Turkey came in three times higher than EU standards in the rate of inflation. In 2007 the consumer price index (CPI) was 8.8 percent, whereas the Maastricht required it to have at most 2.8 percent of CPI annually. Meanwhile, the average inflation rate of the 27 EU members was 2.4 percent.

Another deviation appeared in long-term interest rates. Turkey’s annual compounded interest rate was 18.3 percent by the end of 2007, but EU criteria asked for a 5.3 percent interest rate in the given year. Turkey has not been able to achieve lower interest rates despite successful performance in a number of other areas over the last six years. Annual interest rates were 14.9 percent in 2004, 16.2 percent in 2005 and 18 percent in 2006.

As for the EU bloc, the lowest inflation was seen in Malta, with 0.7 percent. In the meantime, Germany and Sweden were the best performers in interest with annual rates of 4.2 percent.

Turkey’s best performance was seen in the budget deficit as a percentage of gross domestic product (GDP), which came as a result of fiscal discipline and the expanding sphere of the registered economy. Similarly, the decreasing budget deficit lifted Treasury’s obligation to borrow from the market through bond auctions. The PSBR as a percentage of GDP, consequently, fell to -1.2 percent (-4.5 percent in 2004). This reads as a very successful situation since the EU criteria wanted a candidate country to have at most -3 percent in this category.

As for the rate of total debts stock over GDP, Turkey’s performance was again praiseworthy. With 38.8 percent, Turkey remained far lower than the EU’s minimum standard of 60 percent. In 2004 this rate was 59.2 percent, almost at the barrier. In the following years, this rate dropped dramatically to 52.3 percent and to 46.1 percent.

Among the member countries, Estonia has the lowest debt stock over the GDP, 3.4 percent, followed by Luxembourg (6.8 percent) and Latvia (9.7 percent).

The Maastricht criteria are the five basic standards, set out in the Treaty of Maastricht, that need to be met by European countries if they seek to become full members of the EU. The EU requires candidate countries to have price stability and an inflation rate of no more than 1.5 percentage points above the rate for the three EU countries with the lowest inflation over the previous year. In terms of budget deficit, a candidate must have a rate below 3 percent of its GDP. Its public debt must not exceed 60 percent of GDP, but if debt levels are in steady decline, it may be allowed to adopt the euro as its basic currency even though its debt level may be higher than this rate. Another criterion for accession to the EU is that the long-term interest rate should be no more than 2 percentage points above the rate in the three EU countries with the lowest interest rates over the previous year. Finally, the exchange rate of the currency of a candidate country should have stayed within certain pre-set margins of fluctuation for two years.

Source: todayszaman.com

Publication date: 9/15/2008

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