Turkey is a country in crisis, the Lira's freefall being a case in point. President Erdogan needs to tackle this, but a diplomatic row with the US could force him to go against his nature, writes DW's Seda Serdar.
Instead of finding a solution, Turkey chose to retaliate by increasing import tariffs on certain US products. But to deescalate the tension, Erdogan could and should end up doing something he's not used to: take a step back and free Pastor Brunson.
Power struggle
The Trump administration is demanding the immediate release of Brunson, who has been held since 2016 on terrorism and espionage charges. Erdogan isn't keen to return the pastor, because he is hoping to exchange him for Muslim cleric Fethullah Gülen, currently living in exile in Pennsylvania. The aging religious leader is considered the mastermind behind the 2016 failed coup.
Meanwhile, Erdogan is even thinking about pursuing alternatives to the US-Turkish partnership in case the two countries aren't able to resolve their issues. But this isn't a realistic approach. Russia or China cannot be alternatives to the traditional Western alliance. Such relations would be against the values of modern Turkey, a country that still ostensibly believes in democracy and freedom of speech.
Certainly Turkey needs to have good relations with oil-rich Russia and economic giant China, and it's no secret that Erdogan feels more at home looking eastward, but Turkey needs to be cautious in establishing close relationships with these autocratic regimes. In such an unstable region, Turkey needs its NATO partners and vice versa.
Erdogan is aware of this. Pastor Brunson is not the main issue in this conflict. He's just a symbol of the power struggle between Trump and Erdogan. But the diplomatic crisis around the pastor is harming Turkey.
Turkey and the US are both NATO members and allies, and must strive to remain so. But unless the Brunson case is resolved, the tension with the US will not diminish and Turkey's political climate at home will remain volatile. For that reason, Erdogan must send Brunson home. The sooner Ankara makes this happen, the better for everyone, especially for Turkey.
Turkey needs the West as much as the West needs Turkey. The Europeans know this so much better than Washington. When there is instability in the region, Europe is the first to face the consequences, not the US across the Atlantic.
Turkey's goal should be to be a strong partner to the West. The Western nations might not always come across as best friends in Turkey's eyes, but they remain reliable partners when it comes to security and strategic issues.
Meanwhile Berlin has been closely observing the whole debate. While Trump is pushing Turkey to its limits, Berlin is trying to continue a dialogue as a representative of Western values.
When Erdogan visits Germany at the end of September, he will be given military honors and a banquet. But while the red carpet is being rolled out, Germany will continue to regard Erdogan with a critical eye, considering Turkey's democratic deficits.
It is important to keep the dialogue channels open. The conflict with the US ought to be resolved by then and it depends on Erdogan how pleasant his Berlin visit will be for both sides.
Erdogan's problems will not end with the pastor's fate. He still has to make his country attractive again for investors, and in order to do so, he needs political stability and a concrete plan to fix the economy. And this will most likely have Turkey knocking on the International Monetary Fund's door once again.
Turkey's currency crisis explained
The Turkish lira crash is threatening to turn into a debt and liquidity crisis. DW explains how the lira got to this point.
Image: picture-alliance/A.Gocher
The big picture
Turkey is in the throes of a full-blown currency crisis, with the Turkish lira losing nearly 45 percent of its value since the start of the year. The currency crisis threatens to plunge the world's 18th-largest economy into a financial crisis and trigger contagion in emerging markets and Europe.
Image: Getty Images/C. Mc Grath
Search for yield
Turkey has traditionally suffered from a large current account deficit. This difference between import and export of goods and services has been filled through external borrowing in foreign currency. A decade of easy money and low interest rates in the United States and EU following the 2008 financial crisis led to investors searching for higher yields to emerging markets like Turkey.
Image: AP
Credit-fueled growth
The external funds entered the Turkish economy to finance deficits, massive government spending and company borrowing. Credit-fueled growth helped the Turkish economy grow and boosted the government’s popularity through increased consumption and major construction projects. Here, road paint reads: "Slow down."
Image: Getty Images/AFP/O. Kose
Reducing exposure to emerging markets
Investors have pulled back money from emerging markets in recent months as the US Federal Reserve has steadily raised interest rates and is cutting back on easy money policies in response to a robust American economy. This has caused the dollar to increase, the lira to fall, and Turkish bond yields to rise.
Image: Getty Images/S. Platt
Loss of confidence in Erdogan's strong hand
The pressure on Turkey is reflective of broader trends in emerging markets, although the lira is by far the worst performer. That's because investors have lost confidence in management of the economy under President Recep Tayyip Erdogan, who believes in unorthodox economic policy, demands low interest rates and constantly assails "the interest rate lobby." Inflation is at 16 percent a year.
Image: Getty Images/AFP/B. Kilic
Trump's tweet shakes markets
On August 10, US President Donald Trump announced higher tariffs on Turkish imports of steel and aluminum. The tariffs themselves are minor and impact around $1 billion (€875 million) in trade, but they weighed on market confidence in the vulnerable Turkish economy. Even more, Trump’s direct reference to the Turkish lira sent the currency tumbling.
Image: Twitter/Trump
Frenemies
The imprisonment of US pastor Andrew Brunson has weighed heavily on relations, leading to a series of escalations. Ties between the two NATO allies have also nosedived over US support for Syrian Kurdish forces, Ankara's plans to buy a Russian missile system and Turkey's demand that Washington extradite US-based Islamic cleric Fethullah Gulen, whom Erdogan blames for the failed July 2016 coup bid.
Image: Reuters/K. Lemarque
One man show
Poor relations between Washington and Ankara have added to Turkey's economic woes, but given broader fundamentals it is only a proximate cause of the market mayhem. More than 30 percent of the lira’s loss has come since June, when Erdogan took over the office with new sweeping powers. Erdogan's authoritarian hand has distanced the country from traditional Western allies and hit confidence.
Image: picture alliance/AP Photo/E. Gurel
Albayrak: the son-in-law
After winning a June election, Erdogan spooked markets when he tightened his control over the central bank. Instead of appointing technocrats, Erdogan appointed his son-in-law Berat Albayrak (pictured) to lead the newly empowered Finance Ministry. This has raised concerns over the central bank's independence given the president’s repeated statements against raising interest rates.
Image: picture-alliance/M. Alkac
'Economic war'
Erdogan has not inspired confidence in responding to the lira meltdown. He speaks of "economic war" and a "campaign" waged by external powers designed to weaken Turkey. Instead of taking drastic action to shore up confidence, such as raising interest rates or going to the International Monetary Fund (IMF), the government is couching itself in nationalistic rhetoric of sacrifice.