Six charts that are key to understanding Italy’s referendum- Dissatisfaction hampers support for reform of odd parliamentary system

Italy’s referendum on proposed constitutional changes on December 4 is unnerving markets and could prematurely end the premiership of Matteo Renzi, who has staked his term in office on the outcome.

Following the UK’s Brexit vote in June and the election of Donald Trump in the US, the Italian referendum has gained significance as the next potential opportunity for an anti-establishment vote. So what is it all about?

How the parliament could change

Currently two chambers, the Senate and the chamber of deputies, are both elected in the same way and in effect hold the same powers: both must approve a law in identical form. More often than not this leads to protracted negotiations, numerous amendments, and overly complicated legislation. 

If Yes wins the referendum, the Lower House will become the primary legislative body, while the Senate will become a “House of Regions and Municipalities” with no veto and limited and specific legislative powers. If Yes wins, the number of senators will be cut from 315 to 100. 

The Italian parliamentary system is currently one of the most burdensome in the world. Across both chambers, Italy has 952 members of parliament, the third-largest number in the world after China and the UK and one of the only four countries globally to have more than 900 MPs. 

Although members of the UK’s House of Lords can claim expenses of up to £300 for each sitting day, they do not receive a salary. Italian senators are currently salaried but if the reform passes that will no longer be the case. 

The cut in Senator numbers is even more critical in light of how much they get paid 

According to the UK’s Independent Parliamentary Standards Authority, the gross salary of an Italian parliamentarian is the second-highest of major advanced countries after the US. It is higher than any other major European country, and nearly double what UK MPs receive. And this is without accounting for expenses and allowances. 

Another core element of the reform: re-centralising power

If the reform goes through, regions would lose oversight of energy, strategic infrastructure and civil protection. The responsibility would instead go to the central government. 

“Italy has become a quite decentralised country,” the OECD noted in its 2013 country report. Indeed, regional government accounts for over three-fourths of national procurement. That is around double the share in the UK and above most European countries. 

According to the same report “for some policy areas the decentralisation to regions does not make much sense”. It highlights energy policy, where “current arrangements require every region to have its own strategic energy plan”.

Many economists support the redesign

“Once in place, the reform should permit more efficient policymaking, reduce ambiguity about who is responsible for what, avoid implementation delays due to subnational government not following through on national legislation,” writes the OECD. 

The reform “would allow the government to regain certain key responsibilities, which would make the public administration more effective, while allowing simultaneous devolution and control on other areas”, Lorenzo Codogno, a former chief economist at the country’s Treasury department, has said. 

Critics claim democracy will be impoverished 

The main argument of critics is that the Senate’s limited legislative powers would undermine the checks and balances of the Italian constitutional system, especially in light of the new electoral reform. The eligibility of some of the regional representatives and how they can function in their double roles of functionaries and Senators also raised concerns. 

They also point out there are many uncertainties over how the new system would actually work. 

Anti-reform or anti-Renzi?

It is difficult to say whether the Italian public shares these views or whether a No vote would mostly indicate lack of support for Mr Renzi. A recent survey, for example, showed that only about one-in-10 Italians know the details of the reform, meaning anti-Renzi protest votes are playing an important role. 

It is not difficult to understand why Italians are dissatisfied. This, after all, is a country where nearly one-third of the population is at risk of poverty or social exclusion and where youth unemployment is still at 37 per cent, and as high as 50 per cent in the south of the country. Polls appear to show those who live in the south and younger people are more likely to be against the reform.

Low levels of trust in Mr Renzi also do not help build a consensus. The prime minister is currently trusted by 32 per cent of the population, higher than any other party leader but 20 percentage points below the president, Sergio Mattarella. 

But votes are harder to predict

It is illegal to publish polls for two weeks before elections in Italy, but the last available figures appeared to show No in the lead. This will not please many top Italian chief executives who almost unanimously expressed support for the reform. 

Yet recent electoral results showed that we should treat voting intentions polls with a pinch of salt. The gap between support for Yes and No is fairly narrow and a large proportion of the population has not expressed a view on the vote.

Support is particularly difficult to gauge in Italy because a significant part of the electorate is not surveyed. More than 1m Italian expatriates took part in the 2013 general election, more than half living in European countries. 

One million expat votes are not a game changer in a country where around 35m people will vote domestically, but they could make a difference in a tight race. In previous elections, Italians abroad have given little support to the Five Star Movement and Silvio Berlusconi’s party Forza Italia. Both support the No campaign. 

Whatever the outcome, the market reaction to the No lead and the uncertainty has been decidedly negative. 

The Italian government bond yield, a measure of market-perceived risk, has been rising, while the spread with the German and Spanish bonds has been hitting a new record high nearly every day.

Five charts show why earthquakes in Italy are so destructive

NOVEMBER 18, 2016 

by: Valentina Romei

There are have been nearly 200 earthquakes of magnitude 4.5 or greater since July. The greatest number were in New Zealand, Indonesia and Japan, but only three of these were classified by the US Geological Survey as having the maximum risk of fatalities and economic losses. All were in Italy. 

Italy often hits the headlines for destructive earthquakes, but “in an international perspective, Italian earthquakes are small”, explains Gianluca Valensise, director of research at the Italian Institute of Seismology. 

In the past century Japan, Chile and the Philippines were shaken by more than 10 earthquakes of magnitudes of 7 or greater, compared with two that struck Italy, in 1908 and 1915. Italy has not experienced any earthquake of 8+ compared to seven in Chile and 20 in the world. 

The number of casualties from earthquakes in southern Europe show that these events tend to be much more destructive on the peninsula. Italy had fewer earthquakes rated 5+ than Turkey and Greece in the last century, but they caused at least double the number of fatalities. 

So why do they cause so much damage? 

More densely populated

Italy’s population density is more than double that of in Turkey and Greece and about 12 times that of New Zealand. 

Moreover, in Italy a larger proportion of the population lives in rural areas, while the Greek and Turkish populations are more concentrated in urban centres.

This means that when an earthquake hits Italy, it is much more likely to affect a populated area than in Greece and Turkey. 

A different type of quake — and right under Italians’ feet

Subduction earthquakes, caused by plate convergence, are much stronger, like the one in Japan in 2011 or in Chile in 1960, but their epicentre is usually in the oceans, far away from urban centres. These types of earthquakes are particularly dangerous for tall buildings, but not so much for one or two storey constructions. 

On the other hand, most Italian earthquakes are of relatively small magnitude and these affect small buildings the most. They also happen right under the feet of the population. The riskier area is along the Apennines, a mountain range at the centre of the country. 

Smaller magnitudes does not equate to smaller risk.

“Over a certain level of magnitude, usually between 5-5.6, the shaking itself does not increase, but a higher magnitude will spread to a wider area and will last for longer,” Dr Valensise told the FT.

Ageing architecture

When an earthquake does hit an Italian town or a city, it is likely to cause more damage because its buildings are old. 

In Italy a significant proportion of houses — about one in 10 — is more than a century old and half of the housing stock was built before 1971, the year in which the first anti-seismic building regulation came into place for new residential properties and radical renovations. 

However, that figure is the national average. In Amatrice, the town that was destroyed by the earthquake of August 24, 76 per cent of the housing stock was built before 1971. That number was even higher — 86 per cent — in the town of Accumoli, which is in ruins after the same quake. 

Weak government oversight

Italy has an anti-seismic building regulation that assesses risk levels and provides technical guidance on how to build safer dwellings. But it is relatively new. The 1970s regulation excluded half of the country from the risk map. It was only in 2003 when a more accurate seismic map was adopted and only in 2009 when it was coupled with a comprehensive and up-to-date building regulation for new buildings and structural renovation. 

To this day, there is no single regulation on existing buildings, largely because of the huge costs involved. 

Despite that Norcia, a town near Perugia in the region of Umbria, went through a process of anti-seismic improvements on all its buildings because of its seismic history. During the earthquakes of August, the town registered very limited damage. Because Amatrice had been lucky in the past, its residents did not improve their dwellings in a similar way resulting in the disastrous outcome of the summer. 

In comparison, in Japan there is a comprehensive anti-seismic regulation dating back to the 1920s, making the vast majority of housing stock in line with the regulation. “Regardless, when an earthquake does hit the land, it causes damages also in Japan,” adds Dr Valensise.

Bottom line? The government pays

In Italy, earthquake insurance is almost non-existent. Attempts to introduce it failed both because of the costs involved and because of the difficulties in assessing the risk. 

“In order to insure a building against earthquakes we should know how houses are built. At the moment the risk premium would need to be assessed dwelling by dwelling, which is simply not feasible,” adds Dr Valensise. 

This means the government is left with the responsibility of paying for the rebuilding costs. The Significant Earthquake database from the National Oceanic and Atmospheric Administration has not yet disclosed how much the reparations from this year’s earthquakes will cost, but estimates vary from $2.5bn to $16bn which is how much the l’Aquila earthquake of 2009 and the 2012 earthquake in Emilia Romagna ended up costing respectively. 

This is certainly not good news for a country struggling to improve its fiscal balance and reduce its debt.

Greek economic set to expand, but it could be ‘statistical growth’

SEPTEMBER 26, 2016 

by: Valentina Romei

On Wednesday, Greek prime minister Alexis Tsipras told Reuters that the country could beat expectations and report an expansion in 2016.

The consensus among economists is that the Greek economy will expand in 2017, and in their latest Economic Outlook the OECD also stated that “growth is projected to turn positive in the second half of 2016”. Positive trends are already visible, yet it might be too soon to call this the beginning of a recovery.

One of the most promising measures is the strong tourism figures. In July this year, 4.7 million travellers reached Greece, nearly six per cent more than the already strong figures from last year. The number of tourists from the EU increased by a staggering 19 per cent, largely due to the perceived risks of travelling to Turkey and northern Africa. The number of nights spent in tourist accommodations reached record high in the 12-months to September.

This is particularly good news for Greece considering the country depends on tourism for about 20 per cent of its GDP, according to the association of Greek tourist enterprises.

Tourism is a driver behind the recovery in employment in the accommodation and food service sector. Employment in the sector is now above pre-crisis levels while total employment is still 20 per cent below 2008 levels, despite improvements in the latest months.

The Greek manufacturing sector is also improving. The Markit purchasing manager index showed that the sector was expanding in August, with new export orders showing the sharpest increase in over two years. This is in line with improvements in the actual industrial and manufacturing production indices.

Positive trends are visible also in the consumer sector. Car registrations, for example, increased by 45 per cent in the 12-months to May this year since their lowest level in March 2013. Back then, they were about 80 per cent below their peak in 2004.

Yet despite all these positive signs, the Greek economy has not quite reached a turning point.

Even the strong tourism figures hide that the fact that revenues from tourism actually fell in July compared to the same month last year, particularly among German tourists. This could indicate that tourists were attracted by discounted prices, or it could point to tax evasions practices.

Frank Gill – Senior Director EMEA Sovereign Ratings at S&P Global Ratings – expects the economy to stage a ‘statistical recovery’ next year, meaning that the economy will bounce back largely because of the very low base it reached after deep, prolonged and multiple recessions.

The Greek government had not been paying its suppliers because of the its serious problems of cash flow. But this year Greece’s Third Economic Adjustment Programme “includes plans to pay down an estimated three per cent of GDP of arrears to the private sector, where firms are likely to clear their own wage arrears to employees, who may then spend them”, explains Mr. Gill.

The cash inflow of the arrears payments are expected to be the main drivers of the recovery in the second half of the year, but they are only a transitory factor.

The real problem is the lack of investment, particularly in the private sector. Although investment grew in the second quarter of this year, the measure has been volatile in the last three years and there have been no signs of a coherent growth.

A strong recovery in investment is particularly difficult as the banking system has been stymied by its high share of non-perming loans which have nearly hit 40 per cent.

In response, the government has passed laws that could potentially enable some commercial banks to sell non-performing loans. But it would take years for this to be put into practice. As Mr Gill put it, “it’s very early days to identify some potential buyers for these NPL”.

According to the OECD the implementation of planned social policies – such as the Guaranteed Minimum income – would alleviate poverty, which rose dramatically during the crisis. Fighting tax evasion and rationalising the pension system is also – somewhat optimistically – expected to help pay for those policies. But the report also warns of ‘rising global risks’ which pose a threat to Greek exports growth, not to mention the high and rising price that Greece is having to pay due to the refugee crisis.

Given these indicators Mr. Gill says “it’s hard to identify anything that could drive sustained growth apart from a statistical recovery”.

The scale of the European investment crisis and why it matters

OCTOBER 6, 2016 

by: Valentina Romei

Investment in Europe, both public and private, dropped dramatically following the international financial crisis, and in its aftermath growth has been weak in some countries and non-existent in others. The lack of investment growth is particularly worrying in peripheral countries where it hampers the chances of future economic and productivity growth, as well as limiting employment expansion.

Just how steep was the drop?

It’s pretty serious. The Eurozone economy is now about six per cent larger than it was ten years ago, but the real value of investments is still six per cent below its 2006 levels. When compared to the pre-crisis peak in the first quarter of 2008 the drop is even larger, about twelve per cent.

The investment crisis hit the peripheral countries — Greece, Italy, Portugal and Spain — particularly hard. The real value of investments in Portugal, Spain and Italy is about 30 per cent smaller than ten years ago, while that of Greece shrank by 70 per cent.

Were it not for the contraction of investment, the Portuguese economy would have expanded by five per cent in the last ten years instead of contracting; the Italian output would have been flat rather than six per cent smaller and the Greek economy would be 8 per cent, rather than 24 per cent, smaller than ten years ago. And this is without taking into account the multiplying effect of investment on consumption and productivity.

Most peripheral countries are now showing signs of recovery. In Spain, gross fixed capital formation rose by 17 per cent since its lowest point in 2013. In Italy the sector started expanding again in 2014, but only marginally, while in Portugal investment started declining again after a couple of years of recovery. All of them have a long way to go to return to ‘normality’.

The drop is partly due to the collapse of the housing bubble in some of those countries, particularly Spain. And “a swift return to those investment levels would not to be expected or desired” writes a McKinsey report aptly titled “Investing in growth”.

In Greece, investment in dwelling dropped in real terms from €5.3bn ten years ago to just €300m now, a staggering 94 per cent drop. Investment levels in dwellings were halved in Portugal and Spain.

But the drop was not confined to dwellings. Investment in other buildings including factories and schools also fell, as did spending in buying and updating machinery and equipment.

Experts are growing concerned

Economists agree that it matters a great deal, and say it could actually be instrumental to European stability.

The lack of investment growth “is a big concern in terms of demand but also in terms of productivity and potential growth” explains Sebastian Barnes, a senior economist at the OECD and head of its EU desk.

“Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock” writeMarco Buti and Philipp Mohl from the Economic and Financial Arm of the European Commission.

“The EU investment crisis means obsolescence of capital, losses in terms of technological advances and potential constraints affecting an effective reallocation of resources” warned a report from the European Investment Bank.

So why is investment not growing?

There is little appetite to invest when demand – both domestic and international — is sluggish, banks are burdened with a heaping pile of bad debts, alternative forms of lending are limited, and uncertainty about the future is high as is the case in peripheral Europe, to varying degrees.

It’s a vicious circle. Until investment growth doesn’t pick up, demand is likely to remain sluggish and the proportion of non-performing loans has little chances of declining. As a result, confidence is unlikely to pick up: “a low growth trap”, as the OECD put it.

The way out? Reforms

In order to escape the low-growth trap and foster investment, governments should work on making their countries more attractive to investors and make investments easier by introducing labour and product-market reforms. This has been repeatedly advocated by both the IMF and the OECD.

These countries did start a process of reforms to improve their competitiveness, including major labour market reforms in Italy and Spain, albeit with little uplift in investments so far. Mr. Barnes encourages governments to do more, particularly in terms of product reforms.

Another major challenge is the financing glut

Stacked with mountainous bad debts, banks can hardly focus on financing new investments. The Capital Market Union, the European project aimed at developing alternative sources of finance firms across the member states, would come in handy at this time. But after the UK voted to leave the EU the project slowed down, to say the least.

Shaking up the status quo

European countries, particularly in the periphery, cut public investment following the financial crisis. As conditions improved, many governments began adopting looser policies, but this barely affected spending in investment. Instead, taxes were cut and administrations focused on encouraging consumption. But, says Barnes, these initiatives won’t do much to promote longer-term growth.

One way public investment could be bolstered is by rethinking the European Union’s fiscal rules and exclude net investment from the spending limit of three per cent of GDP. This is a controversial suggestion, but as they say sometimes stirring the boat is the only way to keep it from sinking.

Why Europe’s banks will never be the same again

European banks have been shrinking since the financial crisis, dwindling both in terms of their market value, number of branches and staff. Their fortunes have suffered and profits fallen as a result of stricter regulations, general economic weakness and low interest rates.

It’s unlikely that they will ever be the same again. All the more so as the decline in Europe’s over-reliance on banks could present new opportunities for the region to develop much-needed alternative financing channels.

Financial companies lost one trillion euros in market value

Since August 2007 the 471 financial companies that form Datastream’s financials equities sector lost over one trillion euros in market value. That’s the equivalent of Spain’s yearly GDP wiped out.

No other EU sector suffered a comparable loss, not even Oil & Gas contending with low oil prices.

Back in 2007, financial service companies were by far the largest EU Datastream sector by market value, roughly 64 per cent larger than the consumer goods sector. Now they are about the same and the latter was even briefly bigger in the aftermath of Britain’s EU’s referendum.

The worst performing sector in the EU since 2007? Banks

Datastream’s EU financials index has halved since its pre-crisis peak. By comparison, healthcare and consumer goods stocks indices are 70 per cent higher.

This is truly a pan-European story. Bank stocks are traded at less than 40 per cent of their August 2007 prices across all major European countries. German and Italian banks are traded at about 15 per cent their 2007 levels, while the Portuguese banks index is at an incredibly low 2 per cent of its pre-crisis price.

Back in 2007, there were 15 banks among the largest companies by market value of the European Stoxx 600. Today they are down to five.

Thousands of job cuts and axed branches

In 2015 there were more than 27,000 fewer bank branches in the Eurozone than in 2007, a drop of 13 per cent. There were 212,000 fewer people employed in banking, a 10 per cent drop since before the crisis according to the ECB.

The downsizing was particularly dramatic in France – where the number of banks halved to 360 – and Spain where it was exacerbated by a poor recovery in overall employment.

The largely fragmented German banking sector was not left unscathed. In July this year it counted 1,745 credit institutions, 14 per cent less than in the same month in 2007.

The European banking sector needed to downsize

Up until the 1990s the EU banking sector was comparable in size to other advanced countries. But soon after it “became extraordinarily large” and now “Europe is home to the world’s largest banking system” according to Sam Langfield and Marco Pagano, authors of ‘Is Europe overbanked?’.

Behind this disproportionate growth were government policies:

“Eurozone banks (..) benefited from a greater reduction in funding costs owing to government support than US banks” they write.

This meant that alternative forms of funding were hard to come by and to this day they are notoriously weak. The EU’s equity market is about half the size of that of the US, its securitisation market is less than a quarter – this is despite their economy being roughly the same size.

Time for change

According to Langfield and Pagano, the downsizing of the banks has created a slack which “security markets have partly taken up”.

It’s about time. Mario Draghi, president of the ECB, has said that “it’s better to have a plurality of channels financing the real economy than to rely on just one”. And indeed, the point of a Capital Market Union is to “diversify and amplify sources of finance”.

But there is change in the horizon. Langfield and Parano believe the shift from the old bank-based model to market-based finance “is likely to prove structural”.

Four key facts about grammar schools – in charts

Theresa May, Britain’s prime minister, announced on Friday the expansions of grammar schools.

Currently there are just 163 grammar schools in England and Wales totalling 167,000 pupils, or 5 per cent of all state secondary pupils.Back in the 1960s there were nearly 1,300 schools and around one quarter of all state secondary pupils attended them.

Most of the drop happened in the 1970s when Margaret Thatcher – then education secretary – approved the closure of most grammar schools.

The South East has the highest proportion of children attending grammar schools – 12 per cent, according to a report by the House of Commons Library, while there are no grammar schools in the North East. The region accounts for 36 per cent of all grammar school students, with the vast majority in Kent.

Grammar schools are state-funded secondary schools which select pupils based on their ability and academic achievements. The academic results of grammar school pupils are notoriously much higher than those of pupils based in other mainstream schools.

Although plans to approve a fresh wave grammar schools are being floated on grounds of boosting social mobility, the evidence shows that grammar pupils are actually less likely to come from disadvantaged backgrounds.

Various studies have shown that grammar schools have a smaller proportion of pupils eligible for free school meals – a proxy for social deprivation – than other schools.

According to a Sutton Trust report “in local authorities that operate the grammar system, children who are not eligible for free school meals have a much greater chance of attending a grammar school than similarly high achieving children (as measured by their Key Stage 2 test scores) who are eligible for free school meals”.

Other studies have shown that grammar schools have larger proportions of pupils of Asian and Chinese origin, but “grammar schools have lower proportions of Black pupils than other schools”.

Although new or expanding grammars will be required to take a minimum share of pupils from lower income households, many in the educational establishment – such as Ofsted head Sir Michael Wilshaw – have expressed reservations about the plans.

Turkey’s lost momentum for economic reforms

JULY 29, 2016 

by: Valentina Romei

Turkey experienced a period of exceptional growth and institutional transformation in the run-up to the global financial crisis. The country invested in infrastructure, education and health in addition to adopting a number of market-oriented reforms. Data shows that in the years prior to 2008, Turkey grew at a pace similar to that of China.

After the crisis, its rebound was even stronger, but this pace is now difficult to sustain. Turkey’s poor export performance, low foreign investment stocks and unbalanced growth due to a reliance on domestic demand are among the culprits.

The boom decade

Turkey is now unrecognisable from how it was back in 2000. “At the turn of the millennium, there was a huge momentum for reforms and opening, and money coming in spurred among other factors by the negotiations for the country’s accession to the EU,” Vincent Koen, the OECD’s head of Country Studies division, told the Financial Times.

Since then employment in agriculture has more than halved from 40 per cent to less than 20 per cent; the infant mortality rate dropped from 32 per 1,000 live births to 11; male school enrollment in university jumped from less than 30 per cent to 85 per cent.

Turkey’s GDP per capita has converged with that of the EU and is now about one third of the regional average ‒ up from half that proportion.

Unfortunately, civil rights reform did not progress as well as other social measures.

But the future may not be as rosy

Turkey is now growing at a slower pace than a few years ago and it’s failing to meet its potential. In a phase of catching up and with a population that is much younger than other emerging markets in the region, Turkish growth could be much stronger than the 4 per cent of last year.

“The export sector should be considerably strengthened,” the OECD has warned. Turkey’s exports of goods and services account for 28 per cent of GDP, a small proportion compared to Romania’s 41 per cent and Poland’s 47 per cent.

Domestic companies that are largely oriented at the domestic market and low involvement of foreign companies are not helping the country’s trade performance. Indeed, Turkey has one of the lowest foreign direct investment (FDI) stocks as a share of GDP in the region.

“The level of FDI is rather modest due in large part to political uncertainties, but also to the way policy makers make discretionary decisions about what type of investors they are going to favour,” Dr Koen told the FT.

“This is an environment in which foreign investors feel insecure and at a disadvantage compared to well-connected domestic investors”, he added.

There are examples of successful integration in the global value chain. Take the case of Turkey’s car manufacturing industry which produces car components that are exported internationally. Foreign firms ‒ such as Japan’s Toyota and Honda, Germany’s Daimler and the US carmaker Ford ‒ invested in Turkey in order to create assembly facilities which are labour intensive and therefore cheaper to contract to Turkey than in their home country.

The automotive industry is the fourth largest sector of Greenfield foreign investment in the last decade, and indeed one of the most dynamic export sectors. Cars account for the largest export product: around 12 per cent of total export, up from 2 per cent at the beginning of 2000.

But a large proportion of Turkish firms are not part of the global production chain. They tend to be affected by low productivity, have a domestic market orientation and large levels of informality.

Unbalanced growth

“Economic growth remains disproportionately centred on domestic demand,” writesthe OECD in its country’s economic survey released in July. A huge increase in the minimum wage ‒ up 30 per cent from January 1 this year ‒ and strong job creation helped sustain domestic demand despite adverse economic and political conditions in the country and the region.

However Dr Koen warned that “this is not the type of growth that we would like to see, we would prefer economic growth driven more by investments and exports”.

Strong domestic demand and poor export performance result inevitably in a large current account deficit that has been worrying analysts for some time.

Turkey’s current account deficit reached its lowest point in 2011 when it accounted for about 10 per cent of GDP and has narrowed since 2014, largely helped by lower oil prices. But with the recovery of oil prices, the OECD has forecast Turkey’s current account deficit to hover around 5 per cent of GDP in 2017.

This makes the country “highly vulnerable to reversal of capital flows” which could be “highly disruptive because private consumption, investment, and government expenditure must be curtailed abruptly when foreign financing is no longer available”.

The impact of political turmoil

The failed coup and the following institutional fallout threaten economic sustainability in two main ways. The obvious one is a reversal of foreign capital, this was feared in the aftermath of the coup but has not yet been materialised. Secondly, longer term effects could be the lack of reforms and a slowing down in foreign investments.

In order to improve Turkey’s unbalanced growth the government should “work on labour market reforms to make the supply side more efficient and their exports more competitive and they have to make efforts on energy conservation to reduce the energy import bill”, explains Dr Koen.

Turkey took measures to contain domestic demand and as a result lending growth to consumers has slowed down. But with the latest political events and the country’s accession to the EU now in doubt, Dr Koen said there is a real “fear that the reforms momentum could be lost”.