TURKISH MINISTER DESCRIBES EU AND ECONOMIC REFORM

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 000408

SIPDIS

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS KMATHIASEN AND JROSE

E.O. 12958: DECL: 02/26/2012
TAGS: ECIN EFIN EU TU
SUBJECT: TURKISH MINISTER DESCRIBES EU AND ECONOMIC REFORM
STRATEGIES TO A/S SULLIVAN

REF: ANKARA 378

Classified By: Ambassador Ross Wilson for reasons 1.4(b) and (d).



1. (C) Summary: Turkish Minister of Economy and EU Negotiator
Ali Babacan described the profound transformation of Turkey as a
more transparent, globally-interconnected country to visiting
EEB A/S Sullivan on February 10. Following the EU's December
suspension of negotiations over eight chapters, Turkey would
sequence reform based on its own priorities and continue to
move forward in all areas. Babacan said that under the German
Presidency Turkey's accession process seems to be going better
than expected. On the macroeconomic situation, Babacan asserted
that the composition of the current account deficit and how it
was being financed mitigated to some extent the risk of a sharp
adjustment, as did Turkey's reduced public debt and banking
sector vulnerabilities. Babacan admitted the Government might
go slower on things like privatization during this election year
in order to return as a single-party government and achieve more
reforms in over the long term. End Summary.

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Babacan Describes Turkey's Transformation
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2. (C) Minister of Economy and EU Negotiator Ali Babacan met
with A/S Sullivan, Ambassador and Treasury's Karen Mathiasen
February 10 on the margins of the U.S.-Turkey Economic
Partnership Commission (EPC) meetings. After A/S Sullivan
briefed on the EPC and his trip to the region, Babacan launched
into an analysis of the profound changes currently under way in
Turkey. The large number of legislative reforms require a
changed mindset but this has come more slowly, particularly for
the judiciary and police whom he characterized as "inward-looking."
He said after some judicial exchange programs with EU countries,
Turkish judges are increasingly acting in accordance with rulings
of the European Court of Human Rights.


3. (C) Babacan said Turkey had become more transparent and more
connected with the outside world which made the changes more
irreversible. The explosion of radio and tv channels and the
growth of the internet were key. He said the government had put
600,000 computers into Turkish schools, and the goal is to have
internet access in every school in Turkey. As a result, even
young children are following the news. He linked the public
reaction to the Dink assassination to these changes, saying ten
years ago it would have been different. Moreover, in the 1960's
or 70's events were not immediately reflected in financial markets.
Seventy percent of the value of shares traded on the Istanbul Stock
Exchange is held by foreigners. With the markets vulnerable to
radical changes, "no one wants to be the reason things go wrong in
the market."

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Turkey's Revised Approach on EU Accession
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4. (C) Babacan described Turkey's latest thinking on how to
approach the EU accession process since the EU froze
negotiations on eight chapters over the Ankara Protocol
issue. Babacan said it is now clear that Turkey will be
ready for the EU before the EU is ready for Turkey. The
Government attributes the recent problems in Turkey's
accession process to matters internal to the EU: problems
digesting recent members, the constitution impasse, low
economic growth, energy security, etc. In addition, Turkey
is not like any other accession country. By the time it
joins, it will be the largest country by population and area,
it will have the largest single-country bloc in the European
Parliament, and it will be the region's sixth largest economy.
Babacan said the Turkish public's support for EU accession
peaked at 75% in October 2005 but now was around 55%. He
attributed the fall to a feeling that the EU doesn't want
Turkey. Though other accession countries had also experienced
declines in support for accession, in the other countries the
support fell later in the process as difficult reforms were
implemented.


5. (C) Babacan said that since December, Turkey can no longer
justify measures to the Turkish parliament or people by saying
the EU required them. Reforms would have to be justified on
the basis of being good for Turkey on their own merits. In
January the Government decided to prepare its own timetable for
enactment of the EU acquis. Since Turkey will not need to have
implemented the acquis until it becomes a member, before that
time the sequencing will depend on Turkey's priorities. Babacan
used the example of the chapter on Environment, implementation
of which is expected to cost betwee 50 and 80 billion Euros
(public and private sectors combined),a cost that Turkey can
not afford to bear over a period as short as 5 to 7 years.


6. (C) But Babacan emphasized that the Government continued to
believe the accession process was beneficial for Turkey, and he
insisted that work was continuing on all chapters. The Government
message to the public is that "We are doing this for ourselves,
because it is good for Turkey." When it seemed Cyprus would block
chapters aside from the eight chapters suspended over the Ankara
Protocol issue, Babacan said Turkey had told the EU they could not
continue. Under the German Presidency, however, things are turning
out better than expected, with invitations to open chapters. The
EU's movement on reducing the isolation of northern Cyprus was also
positive. He said Turkey targets closing one chapter by the end of
March and two more by the end of June.

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Working on European Public Opinion
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7. (SBU) Babacan acknowledged the importance of public opinion in EU
countries, especially France, which will have to hold a referendum
on Turkish accession. Babacan said even a single visit to Turkey
tends to have an impact on Europeans' perceptions. Turkey now
receives 22 million Euros in grants for people-to-people exchanges
including local government and youth exchange programs, and the
funding will increase. Forty thousand students have already gone on
exchange programs and a total of three hundred eighty thousand are
expected by 2013. In addition, EU tourism to Turkey is increasing,
as are EU-origin individual real estate investors. Total real
estate investment by foreigners (mostly from EU countries) grew
from $800 million in 2004 to $1.5 billion in 2005 to $3 billion in

2006. Babacan repeated his contention that other Muslim countries
are watching Turkey's EU process as an important sign of the West's
attitude toward Islam. A/S Sullivan thanked Babacan for his
analysis and reiterated U.S. support for Turkey's EU accession
process.

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Babacan Downplays Vulnerabilities, Current Account Deficit
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8. (SBU) Babacan downplayed Turkey's vulnerabilities and the
current account deficit (CAD) problem. He said people are coming
to understand the importance of the composition of the high CAD:
"we are importing machines, not chocolates." Energy imports shot
up from $9 billion in 2002 to $29 billion in 2006, almost entirely
due to price increases. At constant prices, 2006 energy imports
would have cost $13 billion. Babacan said the other mitigating
factor is the availability of financing and its composition.
Whereas foreign direct investment (FDI) used to average about $1
billion a year, Turkey attracted $9.5 billion in 2005 and around
$20 billion in 2006, 85-90% of EU origin. Babacan said total
long-term flows in the Capital Account are larger than the CAD.
Finally, Babacan pointed to the importance of a floating exchange
rate regime as a shock absorber.


9. (SBU) The Government nevertheless continued to monitor the CAD
closely, according to Babacan. Public debt ratios have improved,
and the banking sector is far stronger. The Bank regulatory agency
(BRSA) tells him that banks do not take significant foreign exchange
risk positions. The explosive growth of credit card and housing
loans has now stabilized while bank credit to corporations is taking
off -- a healthy sign of private sector investment. Babacan also
linked the Government's continued adherence to fiscal austerity to
prudence arising from the large CAD.

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Reform in the Election Year
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10.(C) Despite Presidential and Parliamentary elections in 2007,
Babacan asserted that Turkey would continue strong fiscal and
monetary policies and would push forward as much reform as possible.
He effectively admitted, however, that with parliament distracted
by politics, the Government's would opt not to push too hard on
difficult issues (such as privatization) before elections, the
better to return to power with a single-party government that will
be able to achieve more reform in the long run.

A/S Sullivan has cleared this cable.

Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON