The Financial Flows and the Future of EU-Turkey Relations

FEUTURE Online Paper No. 9 This paper focuses on the role of financial flows in the future of EU-Turkey relations. The size of financial flows has increased along with increasing integration between EU and Turkey. In this process many macroeconomic variables in Turkey have been significantly influenced by the movements of financial flows through assets and credit channels. The movements of financial flows can be significantly affected by the tone of the relations between EU-Turkey. Especially, under the assumption that EU stabilizes itself, in a world in which global liquidity evaporates, Turkish policy makers cannot afford the conflict scenario. Even in a world of a high global liquidity, the possibility of financial reversals creates huge uncertainty and a potential high cost for the Turkish part. Therefore, focusing on the role of financial flows, under normal conditions, Turkey EU relations are destined to evolve into either convergence or cooperation options. Further-more, the vulnerability of Turkish economy to financial flows can increase the leverage of Europe on Turkey. Turkish authorities should find ways to decrease the sensitivity of the economy to the flows in order to increase their negotiation power in the process