More (or less) Turkish lessons for the Eurozone crisis
OK, here are a few things I left out at this week’s Hurriyet Daily News column, which was also posted here at the blog a couple of hours ago.
First, despite the title, it is important not to make too many parallels to Turkey, as the Turkish crisis was in some ways similar to, but in other ways very different from the Eurozone crisis. For example, I would argue that the 2001 Turkish crisis was fundamentally a fiscal crisis, as it erupted when the markets did not roll over about USD 3.5bn of debt on Feb. 20 2001, instead rushing to convert their liras to dollars. Another similarity is exchange rate pressures. Turkey was implementing an IMF-advised “tablita” system, where the future nominal exchange rate was announced beforehand, to fight inflation. Just to spice things up with a little anecdote: In 1999-2000, I was running some exchange rate regressions for Dani Rodrik, who was an adviser to the Central Bank. I was always getting a really overvalued real exchange rate, which I was attributing to my lack of metrics skills, more than anything else. It turned out my econometrics was not so bad after all:)…
Then, there are the differences: The Turkish crisis was also a banking crisis. And it is often argued that, as reader Mustafa commented over at Daily News, “the recovery of Turkey from the 2000 crisis is related to the banking sector not well integrated to the rest of the world as well as its weak role as a financial intermediary as a research highlighted recently (Erdem2010)”. Of course, the independent Central Bank and baking regulator, which were implemented in the aftermath of the crisis, played important roles in the recovery and the ensuing stability as well- that’s why I shed tears every night on the increasing perception that the two are losing their autonomy more and more every day… Anyway, if you are really interested in the Turkish crisis, I would recommend a short note written by two academics who took on important roles at the Central Bank after the crisis. I tend to agree with them on the root causes of the crisis, but Erinc Yeldan of Bilkent University adopts a more skeptical view in a paper written shortly after crisis, putting the blame on the disinflation program.
So much for the past… As for the present, it seems the two powers of Eurozone, Germany and France (and rest of the Eurozone) have serious disagreements over the role of the ECB for resolving the Eurozone crisis. I already posted Taylan’s column on Germany’s approach in a historical context, and Zerohedge was reporting at Twitter a few hours earlier that “German debt agency head says hypothetically the ECB may not be willing to take some countries sovereign debt as collateral in future and could force euro-zone exit”. If you want to get the opinion of a Turkey economist: I don’t think Germany will cave in unless it gets assurance towards fiscal harmony. But then, I am only a Turkey economist:). More interesting & funny is rumors of an workaround of ECB’s legal barriers by letting it lend to the IMF instead.
Another interesting subject I touched upon in the column is the “democracy deficit”. While my point was simply that a national unity government with a technocrat at the helm would be short-lived, many people have taken the idea to many different directions. For example, since Monday’s column, I have seen some argue that calling for fiscal union is a departure from democracy, and putting unelected technocrats in place in Greece and Italy is all part of “the plan”. Proponents of this view go so far along as to label this as the dictatorship of markets. I have also seen adherents of this view to claim that policies force-fed by unelected governments could lead to extremism, with some saying that the rise of dictatorship in Europe in the 1930s was a direct consequence of the Great Depression. I am not saying I am sympathetic to these views; I don’t know enough political theory or history to comment on the matter- I am simply reporting:)…
Finally, I believe it is also important not to put Greece and Italy into the same basket completely. There are lots of similarities, but also differences, as the Economist and Daniel Gros have recently argued in their excellent analyses of Italy…
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