Last week I participated into a meeting organized by the Undersecretariat of Foreign Trade. The theme of the meeting to be discussed by a limited number of bureaucrats, exporters and academics was how possible negative impacts of the depreciation of Euro on Turkey's exports can be prevented.

Almost 50 percent of exports of Turkey are received by the European Union (EU). The economic problems facing the EU affect Turkey's exports not only through the depreciation of Euro; pace of economic recovery in EU countries is also important for Turkey. If recovery in income levels does not prove as strong as expected, Turkey's exports of goods and services to EU countries will not rise as much as expected, either. There also is a third possible impact channel, though more indirect compared to the first two. We should take into account that in case the crisis in the EU deepens, Turkish firms and banks will have less appetite for and weaker access to foreign funds.

First two impact channels, particularly the income effect, appear to enter into effect even if the crisis does not deepen. High budget deficits and public debt force the governments to tighten monetary policy. The target is first to stop and then to reverse the deterioration in the mentioned indicators.

To do this, they will cut public expenditures and try to improve tax revenues. Excluding some conditions, demand in countries implying this type of policies is expected to be affected adversely. The title of the commentary on Thursday was "Are flying fish rare?" Here, the term flying fish refers to stimulation of domestic demand by such type of policies. Unfortunately, as was also broadly discussed in that commentary, seeing the flying fish is not much likely under the current circumstance. Therefore, we should not expect a buoyant domestic demand in the EU countries in the period ahead. And this implies that they will purchase less of Turkey's exports. It is even harder to make a judgment about how the value of Euro will change. If policies tailored to secure fiscal discipline do not guarantee that public debts will be paid in a timely manner, we should expect that the depreciation of Euro continues. On the other hand, the depreciation in Euro might continue even if the policies reduce the doubts as to whether the debts will be paid in time since the original problems leading to this outcome is intact: the fact that monetary policy is regulated by a single body whereas fiscal policy implementation is multi-headed and incompatible across countries. What is more, fiscal rules introduced to ease the impact of multiple fiscal policies are bypassed; there exists no credible transparency and supervision. Besides, it is not certain how transparency and supervision can be enabled.

Therefore, it is evident that in the coming period Turkey will go through hard times in an important export market. What is more, this will affect some sectors, for instance automotive sector and automotive supply industry, more severely than some others. So what can we do to ease this impact?

First it is necessary to fix this: Turkish Lira is quite valuable, which is not a good thing when only export performance is considered. I believe everything is clear so far; nothing to discuss as the sentence just restated the evident. The problem arises after this step: what can be done next?

There is no simple solution for this problem. I mean, Central Bank's decision to keep the exchange rate within a certain interval is not a solution particularly when it is considered that the unsteadiness will continue for some long time. So it is necessary to design feasible policies. It will be wise to address the problem in two stages: What can we do to overcome the structural problems of exports in the long term? What can we do in the short term about monetary and exchange rate policy on the one hand while informing the public about the economic policies planned to be implemented in the long term on the other? We should always keep the big picture in mind while addressing these issues. That is, we have to implement the measures without disturbing stability. I will deal with the answers to these questions if the country agenda allows.

This commentary was published in Radikal daily on 14.06.2010