Is the Turkish-German spring illusive?

Turkey and Germany are demonstrating willingness to set aside political rows and focus on economic ties, but the thaw in the relationship guarantees neither the investments Turkey expects nor the solution of accumulated problems.

al-monitor German Chancellor Angela Merkel and Turkish President Recep Tayyip Erdogan leave after a news conference at the chancellery in Berlin, Germany, Sept. 28, 2018.  Photo by REUTERS/Fabrizio Bensch.
Fehim Tastekin

Fehim Tastekin


Topics covered

Turkish economy

Nov 1, 2018

Turkey and Germany have shown they cannot give up on each other economically despite the political tensions bruising their relations. President Recep Tayyip Erdogan is happy to welcome guests from Berlin, no matter his harsh accusations against the German government.

Amid charges that Germany harbors suspects wanted in the 2016 coup attempt and abets Kurdish militants, Erdogan has gone as far as to liken German officials to Nazis, while holding several German citizens as virtual “hostages” who could be used as political bargaining chips for Turkish nationals he wants from Germany.

Yet Erdogan has realized he needs to mend fences with European leaders if he wants to find the money to roll over Ankara’s huge debt, stop the flight of foreign capital and break the crisis circle besetting the Turkish economy. Chancellor Angela Merkel made things easier for him when she said in September that Germany has “a strategic interest” in a sound Turkish economy, signaling her view that Turkey’s stability must be maintained despite political spats.

For Turkey, Germany is not only a principal economic partner but also the key to relations with the rest of the European Union. The economic cost of sparring with Berlin bears directly on the real sector, beyond speculative realms. For Germany, meanwhile, any instability in Turkey — a country with a population of 80 million and a gross domestic product of $800 billion — has the potential to affect Europe. Leaving Turkey in turmoil is not something the Germans could risk.

About 7,200 German companies operate in Turkey, employing 120,000 people. In 2017, the bilateral trade volume was $36.4 billion. Germany was the top importer of Turkish goods, amounting to $15.1 billion, and the second largest exporter to Turkey with $21.3 billion. German investments in Turkey total more than $9.3 billion, marked by a downtick mirroring the political climate between the two countries. Last year, German annual investment fell to $295 million as part of a steady decline from $1.9 billion in 2013. Remarkably, 4.5 billion euros ($5.1 billion) were transferred from Turkey to Germany in the second quarter amid Turkey’s economic turmoil.

Following Erdogan’s visit to Germany in late September, German Economic Affairs and Energy Minister Peter Altmaier paid a visit to Turkey on Oct. 25-26 at the helm of an 80-strong delegation that included representatives of German conglomerates such as SAP, Siemens, BASF and EON. A Joint Economic and Trade Committee, agreed upon in 2013 as a means to expedite problem-solving, held its first meeting during the visit, while the Turkish-German Energy Forum convened for the second time.

Turkish Industry and Technology Minister Mustafa Varank announced that his ministry would set up a special “Germany desk” to resolve any problems encountered by German industrialists and investors.

Turkey, which is trying to overcome its economic woes by luring foreign investments instead of seeking aid from the International Monetary Fund (IMF), aspires to update its 1996 customs union accord with the EU, unfreeze membership talks with Brussels, obtain visa-free travel for its citizens, attract more investment in technology and sectors with high added value such as pharmaceuticals and chemicals and boost cooperation in renewable energy. It also hopes the German Development Bank and other lenders will extend more loans to German investors.

The revived contacts have raised optimism of a new chapter in bilateral ties. No doubt the business community welcomes the two governments’ resolve to keep economic ties apart from political rows, but the bumps down the road should not be downplayed. The Germans appear rather cautious about investing in Turkey. Altmaier said during his visit that the “normalization” of conditions would help increase investments. “Normalization” is the key word here and it covers an array of topics.

To start with, Turkey has lost the confidence of foreign investors. Legislative decrees issued during the state of emergency after the coup attempt bore heavily on the business world, with Ankara seizing hundreds of companies and, at one point, blacklisting German firms for alleged links to terrorism. Confidence-eroding interventions have continued after the end of emergency rule through presidential decrees or other legislation. The independence of the central bank remains in doubt. Grumblings have grown louder that Turkey is violating the customs union, levying “compensatory tariffs” despite customs exemptions and restricting commercial activity. To ease the impact of the currency crisis, Ankara has required exporters to convert 80% of their overseas revenue into liras within 180 days of receiving payment, stoking further uneasiness. As long as forcible measures remain in place and no structural reform is forthcoming, optimism over foreign investment is unrealistic.

In a meeting with Erdogan during his visit to Berlin, German business giants with investments in Turkey listed five prerequisites for restoring confidence: strengthening legal security, ensuring that democratic institutions function, ensuring central bank independence, respect for customs union rules and improving the framework for new investments.

Asked whether a new page has been turned in bilateral ties, Kenan Mortan, a senior Turkish economist and visiting scholar at EISTI-Paris, said, “There is no new page because the page was never closed. They are only separating the economy from politics. Ever since the refugee crisis, Merkel has followed a very patient policy, making sure the page remained open. I don’t see how the latest visit could suddenly lead to a leap. The Germans will continue their normal exports, but there will be no big leaps.”

According to Mortan, several factors are drawing Germans to Turkey. “First, the German economy is an export economy and all countries matter for them. They would not let political issues get ahead of the economy,” he told Al-Monitor.

“Second, the Germans are now eyeing big tenders [in Turkey]. They are interested in nuclear energy, the defense industry and railroads,” he said. Singling out Bosch and Siemens as the principal organizers of the German trip to Turkey, along with the German government, Mortan continued, “Siemens, which has assumed all of Turkey’s [railroad] signalization projects, has recently taken a strong interest in nuclear energy and railroad projects. Having missed the second nuclear power plant project, Siemens could be invited to the third one. Bosch, meanwhile, is running all of its Middle East operations from Turkey. They have expanded incredibly in the home appliances sector [from their plant] in Cerkezkoy [in Turkey’s northwest]. Yet dispatching a big delegation does not mean immediate investments. There is an extraordinary decrease in foreign investments [and] what they want is legal guarantees.”

Mortan noted that foreigners have fears over “the security of earnings” in Turkey. “The plan to nationalize 21% of Isbank shares alone is enough to scare them. There is no guarantee this would not be applied to other companies as well,” he said. He said the legislative decrees show Ankara could well resort to a suspension regime on issues concerning the laws of commerce, obligations and debt enforcement and bankruptcy. “In other words, a sword of Damocles is hanging over” the business world, he said.

For Mortan, the thaw with Germany will have no helping effect on Turkey’s efforts to secure external funds to roll over a $209 billion foreign debt over the next 10 months, as some tend to believe. “No link can be drawn between those visits and the effort to secure funds. The address for that is definitely the IMF,” he said.

At the end of his visit, Altmaier expressed hope that bilateral problems would be resolved “piece by piece.” Turkey and Germany have apparently re-embraced the motto that “when Turkey catches cold, Germany sneezes.” This motto, in fact, describes the default settings between two nations that joined their destinies together during WWI, then saw their bonds loosen a bit before taking them to a new level in 1961 with a landmark labor agreement that opened Germany’s doors to Turkish immigrant workers.

Berlin has shocked Ankara by suspending decisions on the upgrade of Turkey’s German-made Leopard tanks and its request to use German technology to make its own Altay tank. This crisis, too, is believed to be transient, just like the political bickering.

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