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Economic Aspects of EnlargementBrussels, 1 February 2005

Dirk VERBEKENEUROPEAN COMMISSION

Economic and Financial Affairs Directorate General

What’s Next for Turkey?

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Setting the stage:Copenhagen requirementsCouncil, June 1993

• Stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities

• Existence of a functioning market economy• Capacity to cope with competitive pressure and

market forces within the Union• Ability to take on the obligations of membership,

including adherence to the aims of political, economic and monetary union

• Constraints: absorption capacity of the EU

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The convergence challenge:

Meeting Copenhagen accession criteria:

– political convergence

– legal convergence: adopting the EU acquis

– economic convergence: ‘functioning market economy…’ and EU integration

Nominal convergence: meeting Maastricht

Real and structural convergence: catching-up to EU levels

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Institutional/legal convergence:Negotiation process

• Start of negotiation process:– October 2005: screening

– Economic Chapters: meet functioning market economy criterion

• Negotiation open ended, “deliveries“ requested

• Membership: around 2015

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Institutional/legal convergence:Open issues in negotiations

• “Difficult chapters”: common agricultural policy, regional policy, budgetary provisions, free movement of persons, environment…

• Aligning Turkish institutions will lead to dramatic modernization of society, comparable to 1920s

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Convergence to ‘functioning market economy’ and EU accession process • completing the reform agenda

– Macroeconomic stability• Structural reforms: narrowing productivity

differential and gap, financial intermediation, …decades of postponed structural reform in Turkey

• Market institutions and regulations

• meeting economic Copenhagen criteria– A question of track-record and keeping to

reform path

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Economic Convergence: Reforms challenges(1)

• Predictability, debt sustainability…

• Privatization: long agenda but too little has happened

• Sectoral shifts incomplete

• Labour market need further improvements: education…participation

• Financial intermediation too low…state banks

• Better than New MS in market entry/exit - SMEs

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Economic convergence:Integration with EU (2)

• Economic integration between the EU-25 and Turkey is well advanced through:

– trade and investment flows

• Institutional framework for bilateral relations between the EU and Turkey.

– Customs Union: free trade in industrial products.

– Progress to liberalise services and agriculture and for some approximation of EU economic legislation.

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Real convergence: catching-up to EU levels

• The real issue and long-term goal

• no EU Standard

– higher average real growth than EU average

– increasing the standard of living of the population

• Income levels Turkey far below EU average

• Population dynamics

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Average GDP per capita in PPS as a % of the EU

GDP/capita (PPS) EU-15=100 AC-10=100 Turkey Bulgaria Romania AC-10 Turkey

1998 29 24 24 44 66 1999 27 24 23 45 60 2000 28 24 23 45 62 2001 24 26 24 46 52 2002 25 26 27 47 53

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Real convergence: prospects

Starting from from 28.5% in 2004:

Under an optimistic growth scenario, (average GDP growth 5.5%) the average GDP per capita (in PPS) would raise to 32.3% of the EU-25 average in 2014.

Reaching 75% of the EU-27 average will take decades!

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Nominal convergence:the Treaty route to EMU

Pre-accession EMU participation with

derogation

Euro zone

EU accession

Adoption of euro

EMU: three phases

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EMU & the adoption of the euro

• Pre-accession Phase -– convergence to market economy - transition

and EU accession process.

– Pre-accession EMU acquis

• Accession Phase– Member State with ‘a derogation from …’

– participating in EMU

– progress towards nominal convergence

• Final Phase: adoption of the euro

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Nominal convergence:EMU pre-accession phase

• no direct public sector financing by central bank

• no privileged access of public sector to financial markets

• central bank independence and ... price stability objective

• full orderly liberalisation of capital movements

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Nominal convergence: EMU’s Accession Phase

– Member State with ‘a derogation from …’

– Participation in EMU’s multilateral surveillance and co-ordination procedures

– Macro economic policy framework:

• Fiscal policy

• Monetary and exchange rate policy

– Progress towards nominal convergence

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EMU’s Final Phase: adoption of the euro

• compliance with the conditions for the adoption of the single currency, following the examination of the achievement of a high degree of sustainable convergence (art. 121)

• The fulfillment of the Maastricht nominal convergence criteria will be the final key to adoption of the euro

• When? The earliest 2017-2018 !!??

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Economic Policy Challenges in Turkey

• safeguarding macroeconomic stability in the medium term. Macroeconomic stability is a precondition for successful financial sector reforms and stable financial sector development.

• Sound development of the financial sector. deficiencies can hamper macroeconomic policies and can cause major damage to macroeconomic stability and growth.

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• The banking sector: Low financial intermediation

Financial sector challenges

Chart 1: Financial vs. economic development

Euro area

Spain

Portugal

Netherlands

Italy

Ireland

Greece

Germany

France

Finland

Belgium

Austria

Slovenia

Poland

Malta

Lithuania

Latvia

HungaryEstonia

Czech Rep.

Cyprus

Slovakia

Bulgaria

Romania

Turkey

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0 5000 10000 15000 20000 25000 30000 35000GDP per capita in EUR (2002)

Dom

esti

c cr

edit

as

% o

f G

DP

(200

2)

Euro area countries

Acceding countries

Candidate countries

Sources: European Commission and IMF.

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• The general business environment, in particular financial discipline and corporate governance of financial and non-financial enterprises. Unregistered economy

• Intermediation and expansion of the financial sector into security markets and insurance, correcting mismatch in duration loans and deposits

• Diversification away from agricultural sector, closure of the education gap

Sectoral challenges:

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Economic policy challenges for MS and the EU

• Higher market competition - labour markets….

• Revisions to community policies: CAP & regional policy

• multilateral surveillance & economic policy coordination - new focus?

• Continuation of reform effort

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Conclusions

Turkey has made substantial economic progress but..

Many aspects to convergence ... & real convergence a medium to long term phenomena under any growth scenario and

Growth can only be accelerated within limits

Institutional/acquis convergence is the key to success, the glue that will join Member States with different levels of economic development together into a functioning Community

Challenges to economic policy on both sides, absorption capacity (financial framework)

Enlargement is (likely) to happen!