EU may finally crack whip on Turkey for rights abuses

The European Union may finally impose substantial financial penalties on Turkish President Recep Tayyip Erdoğan’s government for its human rights abuses, dealing a blow to his government as it seeks the foreign financing to stimulate the economy.

After withholding a larger-than-expected, but still minor, 175 million euros ($210 million) from its Turkey budget this week, Europe’s leaders are considering shelving 3.5 billion euros of loans from the European Investment Bank (EIB) earmarked for the nation’s economy.

The decision, which could spell trouble for a country running a large external financing deficit, would be the most significant measure yet that the EU has taken against Turkey for Erdoğan’s departure from democracy. And it would be wielding the most financial power since the IMF made economic transformation a condition of $20 billion in loans between 1999 and 2003.

European legislators have long called for action against Erdoğan’s Islamist-rooted government as the president increased his stranglehold over the country. Over the past five years, Turkey has imprisoned scores of journalists and human rights activists, curtailed press freedoms and cracked down mercilessly on peaceful demonstration and its Kurdish minority. Erdoğan, who has imposed emergency rule after a failed coup last year, says steps are needed to deal with illegal opposition groups and those who support them, including the Fethullah Gülen movement,

“The frustration and disappointment is significant,” said Marietje Schaake, a member of the European Parliament who works on Turkey issues. “Especially concerning disrespect for human rights and the rules of law … It just goes on and on.”

Turkey’s international reputation has been dealt a further blow this week with allegations that Erdoğan and his ministers were involved in illicit financial trades with Iran to bypass U.S. sanctions. A criminal case against one of the perpetrators, a banker at the state-run Halkbank, is continuing in New York. Turkey says the accusations, made by an Iranian-Turkish businessman, are baseless.

European leaders will likely take the decision to withhold the EIB loans at meetings in Brussels next week, Reuters reported on Nov. 30, citing unidentified diplomats. The cash will be made available to the Ukraine and other ex-Soviet bloc countries instead, they said.

It was not immediately clear whether the European Bank for Reconstruction and Development (EBRD) and Germany’s KfW Bank, other major international financiers to Turkey, would follow suit.

Turkey must currently refinance over $200 billion of private and public sector borrowing annually. The size of the deficit, which has helped Turkey become one of the fastest-growing emerging economies globally, has prompted some investors to withdraw capital from its financial markets, bringing declines for the lira and bonds.

“If implemented, this measure would make a tricky external financing gap that much more difficult,” according to Tim Ash, senior strategist at BlueBay Asset Management in London. “It’s not a terminal blow in terms of Turkey’s ability to finance itself, but I guess it could be important if we see Western private banks spooked by this and following suit.”

The withholding of EIB capital may also hit Erdoğan’s allies in the business world.

When announcing that the EU would increase scrutiny of loans to Turkey in October, officials said the measures would affect financing to firms with close ties to Erdoğan’s government in particular.

Lending from the EIB is traditionally earmarked for large construction projects, or loans provided to small and medium-sized enterprises. Erdoğan has heralded projects such as the Marmaray Tunnel under the Bosporus, which the bank has helped finance with more than 1 billion euros, and the Eurasia Tunnel, which it financed with a 270 million-euro loan, as proof of economic success under his leadership. The EIB is also providing 295 million euros for a metro line in Istanbul, financing for construction of hospitals and a port for oil tankers ($130 million), among others.  

Erdoğan, first to drive through Istanbul's Eurasia Tunnel
Erdoğan, first to drive through Istanbul's Eurasia Tunnel in December 2016

Furthermore, the EIB funnels some of its lending via Turkish banks in the form of SME loans. Partner institutions include Halkbank and state-run agricultural lender Ziraat Bank, as well as large private banks such as Akbank and Yapi Kredi. The financing has helped firms in more impoverished regions of central Anatolia and the country's east, where Erdoğan’s support has been traditionally strong. It last approved such lending on June 30.

German Chancellor Angela Merkel said last month she would press the EU to reduce financing for Turkey’s accession, citing the deterioration in its democracy. The United States suspended visa services in Turkey on Oct. 8 due to a spat over the arrest of Turkish nationals working at its consulates. It has since relaxed the restriction, allowing visas to be issued for specific matters including health problems.

In a letter to EU top diplomat Federica Mogherini and the Commissioner for EU Enlargement Johannes Hahn in July, German Foreign Minister Sigmar Gabriel described Erdoğan's politics as being "in blatant contradiction to our European value system and (demanding) a clear answer."

Erdoğan, in turn, has slammed the EU for double standards, for example singling out Germany and the Netherlands for what he called Nazi-like policies.

Any substantial reduction in EU funding comes at a sensitive time for Erdoğan. He is battling to keep economic growth churning away at a high rate of knots ahead of presidential and parliamentary elections, due in 2019 at the latest.

The government needs fresh sources of revenue to boost investment. A government project that guaranteed loans to troubled firms in the tourism industry and other sectors, worth more than 200 billion liras ($50 billion), is winding up due to financial constraints. Efforts to raise capital for infrastructure by the nation’s off-budget Sovereign Wealth Fund, established last year, have yet to bear fruit.