The profound debate in regards to the possible entrance of Turkey into the EU represents one of the themes of major interest in the world of international relations; not only because of it’s complex political role in the middle east but also in respect to the economical – financial value that a candidate such as Turkey could represent once inside the major European markets. In fact Turkey is paying particular attention to what is happening today in Europe and the United States. The fear that a civil war in Iraq could bring about the independence of Kurdistan is a real problem. In addition to this Europe’s anti-terrorism politics and the delicate problem of immigration represent an obstacle to Turkey’s candidature. France and Germany, in the summer of 2005, had no hesitation in underlining a certain worry in regards to the possible entrance of almost 70 million Muslims into European territory.

The reaction to the financial crisis of 2001 was highly significant in Turkey. During the following four year period the lowering of inflation, from 64% in 1999 to11% in 2004, accompanied by adequate fiscal and monetary policies, opened the door to conspicuous foreign investment which bought about stability and the economical development of the country. This performance was supported by a series of factors: the favourable international context, commerce between States notwithstanding the high price of oil, low inflation, a general interest in emerging markets, and low interest rates that gave the Turkish central bank a certain credibility. State deficit was lowered from 30% of GNP to 1% in 2005, while public sector debt was reduced from 91% of GNP to 56% during the same period. This positive trend is an indication of strong political stability, which contrasts the disastrous performance of the previous government’s economical policies.

The financial crisis of 2001 was the result of a precarious internal climate, especially the tensions between the Prime Minister Ecevit (leader of the ANAP party) and the President Sezer in regards to the method through which pro-Kurdish or pro-Islamic officials were to be removed from their positions, and the privatisation policies for the banking sector. The 2002 victory of Erdogan, ex mayor of Istanbul and head of the reformist wing of the Islamic Party (AKP), opened the way to a liberal reform program which maintained and denied at the same time the conservative values profoundly eradicated in the national spirit. AKP’s program was based on a strong push towards market liberalisation, especially in the telecommunications sector and others such as tobacco and oil, and privatisation through containing public spending. The implementation of a free market, which brought massive foreign investment, went hand-in-hand with a lack of growth in the public sector creating unemployment and cuts to state support for agriculture. The strong presence of foreign capital, which on one hand brought economic growth to the country, on the other was always a sign of structural fragility. The cyclic crisis that Turkey has always been subject to, accompanied by sudden growth demonstrate how the country’s autonomy is still tied to foreign capital. Between 2004 and 2006 foreign investment in the region increased by 76%, especially in the manufacturing, hotel, banking, and financial sectors. The strong revaluation the Lira brought about a constant reduction of exports and a deterioration of the commercial balance that in 2004 registered a negative total of 32 billion dollars.

The Turkish economy’s dependence on foreign capital permitted a favourable trend in foreign investments during the initial part of 2006. One sector that merits particular attention is that of the foreign banks which, notwithstanding the delicate internal political situation, did not hesitate to invest billions in Turkey buying shares in the local credit institutes. The Turkish loan and mortgage markets represent 30% and 3% of GNP, thus constituting appetising terrain for big names such as Bnp Paribas and Citigroup (USA). One characteristic example is the Belgian bank Dexia which bought, for 3.23 billion dollars (the equivalent of 98.9%), the DenizBank in May last year causing a peak in foreign banking investment (2,8 billion to 17,4 billion dollars). Another sector to take into consideration is that of real estate investment: again in the first part of 2006 more than 10% of foreign investment was in real estate operations; in the hotel sector investments reached 32 billion Euro, most coming from the United Kingdom which holds more than half of the capital in this sector.

Until the Spring of last year the market index, as the first table illustrates, showed a constant trend of around 0 – 3%; between May and July the situation precipitated with a fall of 20 – 25%. The financial crisis best understood if compared with the situation on the world market as illustrated in the second table. Around June, in fact, the world exchange index fell a few point in parallel with the performance of the Turkish Lira. The local monetary crisis demonstrates once again the fragility of the economy and the excessive dependence on foreign investment. The situation of the commercial balance provoked another withdrawal of capital and the devaluation of the Lira. If this crisis is to be read in the context of losses on almost all emerging markets the Turkish component occupies the lion’s share. In June 2006 Turkey fell by 29% compared to a total loss on the index of 11%. Low interest rates beginning in the second half of 2006 caused the growth of excessive demand, the result was inflation rising to 10% since May of the same year; inflation that had been 50% influenced by the rise in the cost of oil. Over and above reasons of a financial nature the scale of the crisis was determined by political factors, something that underlines the precarious situation, especially in the international context, of Turkey’s future.

If for decades Turkish foreign policy remained one of nonalignment, thus conserving a role as mediator between the Muslim and western worlds, today we can see a shift towards a far more pro-Islam position. This can be ascribed to last years events which effected a market so dependent on foreign players.

Since the Syrian occupation of the Lebanon, the friction between Turkey, represented by Erdogan, and the west has accentuated progressively. Following the assassination of Rafik Hariri, the Lebanese Prime Minister, the west condemned the occupation while Turkey chose to manifest solidarity towards Syria. Solidarity which extended as far as support for the leader of Hamas, Kaled Meshaal, considered by Isreal, the United States and the European Union as the head of a terrorist organisation. Erdogan welcomed Meshaal to Turkey and chose to openly display an alignment with Iran and Syria. An alignment that while on the one hand offered support to Hezbollah in the Lebanon on the other accentuated the distance from and the denunciation of Israel.

In a July 2006 interview regarding the kidnapping of Israeli soldiers Erdogan supported Hamas in their quest for the liberation of all the families and children held in Israeli jails. In the same period Erdogan declared Israel a “terrorist state”. His tone remained the same as regards the United States, in particular as concerns the kidnapping by American soldiers of Iraqi women and children. The end result of this was an increase in anti-Western and anti-American public sentiment. In an interview with “Tempo Magazine” in Turkey Erdogan declared that almost 36% of Turks believed that America represents a threat to national security. The 2006 “Transatlantic Trend Survey” illustrates how a fall in affection for the United States went hand-in-hand with a greater interest in Islam. During the recent Lebanese crisis 44% of the Turkish population supported Hezbollah while only 9% supported Israel. The murder in Ankara last May of an important magistrate who had pronounced in favour of the “anti-veil” sentence should not be forgotten. This was an episode that damaged relations with the European Union. Another important fact is the manifest desire to maintain a united Iraq in such a fashion as to avoid a civil war that could favour Kurdish nationalism. The failure of the Bush administration on this front has not helped any eventual strengthening of ties between Turkey and the United States.

According to the situation described above it can be deduced that the intention of Erdogan’s party is to abandon Turkey’s traditionally pro-western foreign policy in favour of one decisively more Islamic. The announcement, on May 16 2006, of the intention to open Turkey’s first nuclear reactor at Sinop, on the Black Sea, displays a solid alignment with Iran in regards to energy policy. The complex political game currently being enacted in Turkey and the fragile relations with European and American actors, have had a profound effect on the internal financial markets. The motive for last summer’s loss of a significant amount of the capital invested by European actors, such as the United Kingdom, Belgium and Germany, can be found in political policy. Privatisation programs, such as those in the telecommunications and refining sectors, and the foreign investments in the banking sector have tied the Turkish economy to the strategies of the large foreign investors who, in moments of political tension, do not hesitate in abandoning the country to the mercies of series financial crisis such as that of May 2006. The desire to create a Turkey eradicated in Islamic culture will be the central theme of the next presidential and political elections which will be held in May and November respectively. Elections which already see Erdogan as the favourite. It will be a decisive year in which the Iranian – Syrian - Turkish Islamic axis, the American interests in the Middle-East and the problems related to Turkey’s entrance into the European Union will pose difficult questions in regards to the future of democracy in the political struggle between East and West.