To succeed, the measures introduced by the two must be reinforced by policies to improve public savings.

We have always loved danger. Just take a look at the history of Turkey's economy: the savings-investment imbalance has always been a prevalent phenomenon. The economy has grown beyond its means in any given period. Turkey's growth always has required net capital inflows. And in any given period the financing of this growth-beyond-means has been troubled and has given anxiety to us. And indeed this is what is happening now. From this perspective, yes, we have seen this movie before, but this is the first time we have watched the new version. I guess this is the message that the Central Bank also is trying to deliver nowadays. Since the world has entered this twilight zone life has become more dangerous also for countries like Turkey.

The main issue of the global economy in the early 2010 was the future of the European Union economies with a particular focus on the Greek crisis. Now in 2011, the main issue at debate is the banking systems of the European Union countries. The question is also about the future. Yesterday Bloomberg said that Moody's was going to reduce France's grade, which is AAA. So it is just that the old issue has turned out to appear from a different perspective. As the Chinese saying goes, when you climb up the mountain, your perspective changes. You can also read it this like "as the crises climbs, the source of the problem starts to look different." This is what is happening in Europe. And Europe's problems are quite relevant for Turkey.

Since the beginning of 2010 foreign fund inflows to Turkey have been elevated along with the crisis across the European economies. Fund flows have not been as strong as in the pre-crisis period, but they are rising. But this time the prominent feature of the fund flows is that the share of short term funds tends to increase gradually. The low rate of returns in Europe and the expectation that this trend will prevail makes Turkey a strong candidate for fund inflows. So, in fact, there should have been no concerns about the financing of the current account deficit. Let this be the first point to emphasize.

Then, what is the danger? We are at the bottom of the ladder concerning fund inflows, but the current account deficit as a ratio to FX generating export and tourism revenues already has reached the pre-crisis levels. Following the 2001, crisis Turkey got out of the hole into which it had sunk for almost nine quarters, as it did in the 2008 crisis. However, in the case of the latter, the capacity to secure FX generating export and tourism revenues that would trigger the recovery was much more limited. The current crisis in Europe evidently has something to do with this. The slow recovery in Europe makes Turkey's recovery process even more risky; and this is quite bad. This is the second point to stress.

Where does the problem lie? The problem is that Turkey's rapid recovery is driven solely by domestic demand. Turkey's exports, as a part of the economic basin, still stands way below the pre-crisis levels whereas the level of production has recovered to pre-crisis levels. The dynamism of Turkey's economy right next to Europe in trouble cuts a wide swath. The hike in short-term funds adds to the vulnerability of Turkey's economy. What needs to be done is to slow down the economic activity in Turkey. So the recent decisions of the Central Bank of the Republic of Turkey (CBRT) and the Banking Regulation and Supervision Agency (BRSA) must be read with this in mind. This would be the third point to highlight.

For now, the decisions by the CBRT and BRSA only deliver with neon lights the message "this time it is even more dangerous than you think." To be successful, the measures introduced by the two must be reinforced by policies to improve public savings. But who believes that austerity measures will be introduced on the eve of the elections? Not me!

This commentary was published in Radikal daily on 21.12.2010