In an annual progress report due to be released on Nov. 5, the European Commission notes that Turkey implemented economic policies in line with the commission's recommendations and successfully completed a stand-by agreement with International Monetary Fund (IMF) in May 2008.
It says, however, that Turkey needs to make further reforms in its economic programs. The report singles out the domestic political crisis as hampering the decision-making process with regard to reforms. The commission also notes coordination problems in the economic programs, saying, "Decisions sometimes appear to be taken on an ad hoc basis." The EU seems to be satisfied with Turkey's overall performance, noting that "consensus on economic policy essentials has been maintained, and coordination has improved."

The report blames the economic slowdown in Turkey in the first half of 2008 on global financial turbulence and domestic political uncertainty. GDP growth in Turkey slowed to 1.9 percent in the second quarter, from 6.7 percent in the first. Despite the slowdown, the EU acknowledges that the Turkish economy is more resilient and its foundations stronger than ever before.

The report states that the current account balance in Turkey presents a challenge to the Turkish economy and notes that a sharp rise in oil prices has been putting pressure on Turkey's current account deficit. The commission states, however, that Turkey's external position remained solid throughout 2007 and in the first half of 2008 thanks to the continuation of long-term capital inflows to Turkey.

"The impact of financial turbulence on Turkey and on Turkish banks has remained limited," the report notes. It attributes the health of the financial system in Turkey to significant improvements in the policy environment, including prudent regulations, close cooperation amongst Turkish financial institutions, high risk awareness in the banking sector and coherent monetary and fiscal policies.

The commission expresses its concern about unemployment, which is hovering around 10 or 11 percent, and says labor market conditions remain challenging. As for inflation, the report mentions increasing food and energy prices as the main factor in the rise of inflation to 10.6 percent by mid-2008, up from 8.4 percent at the end of 2007. The commission is pleased with Turkey's financial performance, saying it was satisfactory despite the government falling short of its 2007 targets. It cautions, however, that Turkey remains vulnerable to external shock and requires stronger anchors in the face of heightened uncertainty and an ongoing financial crisis.

The commission stresses that the independence of regulatory and monitoring agencies has been largely preserved. It says, "For the first time in several years, significant progress has been made, in particular in the area of price liberalization." Yet it still criticizes the government for controlling the prices of some key commodities through state-owned firms. As for privatization efforts in Turkey, it concludes that privatization has advanced significantly, encouraging the structural transformation of the economy.

The commission took a note of transparency problems and state intervention in the form of aid to various industries. "Overall state intervention continues to influence competition and competitiveness considerably," the report says.

The commission also analyzed the economic integration of Turkey into the EU, concluding in its report that liberal trade policies have increased marginally. While the share of exports to the EU grew slightly from 56 percent to 56.4 percent in 2007, imports from the EU declined, from 42.6 percent to 40.4 percent. It highlights that the EU remains Turkey's largest trading and investment partner.

In terms of the free movement of goods, the report says technical barriers and horizontal measures continue to be a problem, though some progress has been made toward the general principle of free movement of goods. It acknowledges the progress made in harmonization and the standardization of regulations.





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