Brexit is a bigger problem for the Turkish economy than Syria

I was recently asked how badly Turkey’s military operation in Syria could affect the already troubled economy. Could this move, my inquisitor wanted to know, be the last nail in the economy’s coffin? My answer was no. I think that the highly probable no-deal Brexit at the end of October could have a more negative impact than the limited operation in northern Syria. Why? Let me explain.

It is true that since the 2018 crisis, the Turkish economy is going through a period of severe contraction. Prices are still adjusting to the rapid depreciation of the Turkish Lira. We have slower growth, higher unemployment, an increasing fiscal deficit and a rising public sector borrowing requirement. All this is quite normal in this period of rebalancing, if you ask me.

The relatively strong growth performance of the Turkish economy in 2019 is largely due to higher public spending and better export performance. Both appear to be unsustainable, I’m afraid. First, the severe contraction of the economy is also sucking out the government’s revenue base, so spending cannot continue. Second, the economic slowdown in Germany, coupled with a highly likely no-deal Brexit, will make Turkey’s recent export performance unsustainable.

According to our calculations at the Economic Policy Research Foundation of Turkey (TEPAV), 70 percent of bilateral trade with the U.K. would be negatively affected by a no-deal Brexit this October. There would be a direct and an indirect negative impact on different product groups. The direct impact would be from higher U.K. tariffs to Turkey, while the indirect impact would be from lower U.K. tariffs to some of our competitors. Both require Turkish companies to focus on new arrangements.

So why will Turkey’s military operation into Syria not be as big a problem for the economy? I’m afraid armed conflict has become the norm rather than the exception in our troubled neighborhood. For the past 40 years, Turkish security forces have been leaving their barracks to secure our borders and cities for a long time now. I am not only talking about PKK terrorism inside the country. Armed conflict has been concentrating in the south of Turkey, with none-state actors taking the lead. The Iran-Iraq war went on from 1980 to 1988, and the Americans intervened in the Gulf War in 1991, which led to the creation of the Kurdish Regional Government (KRG).

The 2003 American invasion of Iraq launched its rather ineffective state-building activity, which is still in progress today. Sixteen years on, unrest on the streets was still rather visible, with the death toll last week rising over 100, with many more injured.

So, the nature of conflict in the region has changed. Just look at the Libyan and Syrian civil wars that started in 2011, and the Yemeni one beginning in 2015. Non-state actors took the place of states fighting each other in our troubled neighborhood. The current Turkish military operation is not the first of its kind in the past 40 years, nor will it be the last. Note that it was during this time that the country implemented strong economic programs and industrialized.

It is highly likely that stability on our southern border will require more military action in the coming decades. In this sense, Turkey is just like Israel.