Reflections from the Western front - HATICE KARAHAN

Reflections from the Western front

The people that followed the release of international data on Tuesday must have felt the same sentiments and pace as I did. Here is a summary for those that missed it: The flow of negative data from Europe started early in the morning, with news from France that inflation was at its worst level in the last 5 years. The flow of unpleasant news continued to pour in both from the east and the west of that country. First Spain delivered the message that “devaluation will continue,” and that was immediately followed by Italy stating that was also its position.


It was noon by the time industrial data from the Eurozone was released and made us exclaim “we were not expecting this.” Industrial manufacturing in the zone showed a 1.9 percent year-on-year contraction for August, and had in an instant abandoned the growth trend it had been displaying for a year.

The consumer confidence index for October, which was released at the same time, provided the icing on the cake. The ZEW index, which measures expectations for the zone, registered a 10 point drop for October, continuing the sharp downward trend being witnessed since July.

This unfortunately presents a bleak picture as an indicator for the 4th quarter. Even the German ZEW index depicts a similar development, and for the first time in 2 years presented a pessimistic outlook. Data had just stopped flowing in, when the administrators of the German economy made an announcement. Germany had dropped its growth expectation for 2014 from 1.8 to 1.2 percent. Along with the fall outlook report, they had announced the obvious.


Tuesday was when European data screamed its distress. Did this grim picture of the region come as a surprise? No… However, the seriousness of the task is clear since the latest figures were even more negative than expected. There is no joy for anyone in the region…

Is it just the Europeans faced with this joylessness? Our situation is also very concerning. Because Europe was the branch we were hanging onto via exports during this chaotic year. The appearance of cracks in this branch is a cause of concern for us. This is the situation we find ourselves in, particularly when the other branches are not healthy either…


A deep-lying reason for this is the elasticity of our export revenue. Let me explain it in this way: The fundamentals of a country’s export performance rest on the factors of price and revenue. The price factor is the relative change in the cost of goods and the revenue factor is how demand for goods is impacted by the economic progress of the partner country… Elasticity is the vulnerability of demand in regard to these factors.

Just like we keep banging on about exchange rates and how they affect the competitiveness of prices… that, too, is a critical part of the price factor. However, let me point out that Turkish exports are more impacted when it comes to the revenue factor compared to the price factor. That is the result we derive after delving into long-term data. Various empirical studies also back the argument that Turkish exports are generally revenue elastic. The slightest change in the revenues of our partners is reflected more disproportionately on the demand for our export goods.

Of course, elasticity also depends on the nature of the goods…the simplest example is that the demand for foodstuff cannot be as flexible as the demand for electronic goods. That is why this flexibility can vary based on different regions and the composition of the goods. Taking this into consideration, we can say we are revenue elastic in the European market.  


In 2013, when many European countries adopted economic belt-tightening, imports started displaying an upward trend. The point that caught the eye was their increasing of imports from Turkey. From France to Germany, and the United Kingdom to Spain, the import of Turkish goods was far higher than the average rate of imports.  

As a result, the slightest change in the revenue of a European has a considerable impact on our exports. We have witnessed this to a significant extent in 2014 as well. As we enter the 4th quarter, the impact of a loss of momentum in Europe on our exports is a cause of concern. It is impossible not to be concerned when the share of the pie is reduced by half.


As you are aware, the European Central Bank (ECB) has taken a series of measures in recent times in connection with deflation and slowdown. However, just as Draghi is sick of having to say it and we are sick of having to hear it, the need for reforms in monetary policy is urgent…

Merkel, on the other hand, is applying pressure on the ECB in regard to sluggishness in the Mediterranean economies. She claims that France and Italy will be hesitant to implement reforms by relying on monetary expansion. On the other hand, Paris and Rome are seeking time to implement budget tightening, which Germany is pressing for. They are telling Berlin to make “public sector investments” in the meantime. All joy has been wiped out with the emergence in recent days of the political risk in Greece. Merkel reprimanded member countries yesterday, in a speech in her own parliament, saying, “We won’t let down our guard. Everyone should follow the rules.”

Honestly, we are eagerly anticipating that these parties reach agreement and accelerate growth in the region. We have become confused as to which direction we should look toward. Our eastern front is chaotic. Our western front is sick. We are trying to grow in the middle of war and sickness.

These are tough times for us.    



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