By Antonis Kamaras

This article will first give an overview of the evolving trade relationship between Turkey and Greece and study the factors behind Turkey’s exports being in surplus. The Greek potential for investing in Turkey will also be examined, in the context of the reforms that have taken place in Greece in the last decade.

What deeper causes might lie behind what is seen as Greece and Turkey’s complementary bilateral relationship? This writer believes that they are profoundly political, while some have their origin in the two countries’ ― one hopes ― past adversarial relationship. The article will conclude with an assessment of how the economic relationship of the two countries is likely to evolve in the future in the context of Turkey’s ongoing European Union accession process.

Trade

The volume of bilateral trade between the two neighbors has been on an upward trajectory since the 2001 economic crisis in Turkey. Greek exports of goods to Turkey have recorded an impressive average annual growth rate of around 18 percent over the past five years, reaching 5.4 percent of total Greek exports. In turn, Turkey’s exports to Greece have posted a robust average annual growth rate of 14 percent during the past four years, reaching 1 billion euros, though still comprising only a small share of total Turkish exports. This positive trend is set to continue in the coming years.

Turkish exports have enjoyed a notably consistent surplus in value ranging from 30 to 40 percent over Greek exports during this period. Indicatively, in value terms, Greek exports in 2005 to Turkey stood at 67 percent of Turkish exports to Greece.

A more detailed analysis of the top 12 export categories of the two countries in their bilateral trade in 2005 also demonstrates this point. Generally speaking, Greek exports consist of commodities with a low value-added component. By contrast, Turkish exports are much more diversified manufactured goods with a higher value-added component. Cars, for instance, were the third top Turkish export category in 2005 ― indicatively they account for 15 percent of total Turkish exports. Greece has no car manufacturing industry.

Investments

Should a structural Turkish surplus in bilateral trade be a source of concern from a Greek viewpoint? Probably not. Our economies are deeply complementary, but we have to adopt a longer-term perspective ― let’s say five or 10 years from now ― to allow this complementarity to demonstrate itself.

As seen in Table 1, Greece’s economy is highly service-oriented. Crucially, the Greek market reforms of the 1990s, together with the country’s entry to the European Monetary Union (EMU), for the sake of which they were largely undertaken, have modernized the service economy and helped it grow.

Additionally, Greece’s reforms and macroeconomic stabilization have compelled Greek companies to achieve, from a global point of view, adequate levels of corporate governance. More specifically, the process of entering the EMU has (i) strengthened the credibility and efficacy of Greek regulatory institutions, such as the central bank, whose job is to supervise and police corporate behavior, and (ii) it has stabilized Greece’s economy and helped it to grow. Both these factors have attracted institutional investors from abroad to Greece’s major companies. Foreign institutional investors, in a virtuous cycle, have provided a strong motive for Greek companies to improve their corporate governance structures. This can be seen in Graph 2, according to which Greece has the best corporate governance in Southeastern Europe.

Indeed, if we look at the companies included in the FTSE/ATHEX 20 Index ― basically the top 20 Greek companies ― we see in their ranks the major beneficiaries of the twin processes of macroeconomic stabilization and microeconomic reform. Some of these top 20 Greek firms have benefited from the government’s privatization effort, which has emancipated them from state control. All of them have benefited from low inflation, which has made investment in capital markets more attractive by (i) boosting economic growth, and thus improving the prospects of listed companies, and (ii) correspondingly diminishing the attraction of investing in government bonds, the yields of which fall in tandem with inflation. It is no coincidence that these companies have employed their funding capacity in their regional expansion, in this way making Greece the leading foreign direct investor in the Balkans.

It is this lead in macroeconomic stabilization and reform, in a regional context, that created the conditions for Greece’s EFG Eurobank-Ergasias to acquire Bulgaria’s Post Bank, and not vice versa, or, in the Turkish context, that people are talking about Greek lottery and gaming firm OPAP as a potential investor in the Turkish state lottery, Milli Piyango, and not the other way round.

Looking back to decipher the future

I would like now to speculate briefly on the complementarities of Greece and Turkey. Understanding how these two economies have evolved differently is revealing from an analytical point of view. It is also useful in a practical sense, as it can help one to grasp how the differences that have accumulated in their respective political economies in the past will shape their economic relationship in the future.

These remarks are speculative, provisional and only indicative in nature. However, even if they are wide off the mark, I believe it is in that direction that research must be channeled in the years ahead: which is to say in the direction of understanding how past choices will shape future interaction in the economic relationship between Turkey and Greece.

In manufacturing one can see in Turkey the enduring determination, at the national, collective level, for the country to acquire an industrial capacity which would be indigenously owned and worthy of a modern nation. It was no coincidence that when Sakip Sabanci, the patriarch of one of Turkey’s largest industrial conglomerates, died he received a state funeral. He was accorded that honor because he was widely perceived as having fulfilled the aspiration that Turkey can stand on its own two feet and compete with the best of them. In that respect, he and people like him can be considered co-builders of the Turkish Republic.

Having said that, this status of indigenous entrepreneurship in Turkey has legitimized a level of state support and a bias in favor of ownership and management, as opposed to labor, which in Greece, at least post-1975, have never been acceptable. In fact, Greece’s entry into the European Community, and the accelerated competition that this entailed with the lifting of import tariffs, was accompanied in the 1980s by the introduction of one of the most restrictive labor law regimes in Europe. So when we look at these GDP composition trends or the trade statistics, we are not just looking at cars and refrigerators, cotton and lubricants, we are also looking at two distinct political traditions.

On the other hand, Turkey’s determination to maintain an arms-length relationship with foreign capital, assisted by the benefits of its geopolitical position, particularly in its relationship with the United States and the International Monetary Fund, has often delayed wider reform and made the country at times a less-than-determined EU candidate. This has resulted in macroeconomic volatility and a lower rate of economic growth than the country is capable of achieving.

By contrast, the Greek political leadership has had greater strategic foresight with regard to the EU. This has coincided with some of the less fortunate events which have characterized the relationship between the two countries. Cyprus in 1974 and the more recent crisis, in 1996, over a now very well-known little Aegean island, Imia, demonstrated to Greece’s leaders that the country must compensate for its smaller size and less important geopolitical role by anchoring itself to Europe.

The huge side benefit to this has been that, at critical junctures, Greece has consolidated its modernization in a way that Turkey has not. Indeed, it would be difficult to account for Greece’s early and determined pursuit of EU entry, a country on the periphery of Europe, without taking into account the country’s adversarial relationship with Turkey in the postwar era.

Again, as with Turkish manufacturing, when we observe assertive Greek banks expanding their presence in the Balkans, we must go beyond corporate strategy. We must take into account how Greek policymakers have used the EU anchor to strengthen Greek institutions and these institutions in turn have, by and large, protected the integrity of Greece’s financial markets. Regulatory performance has also been strengthened by democratization. The Bank of Crete scandal in Greece contributed to the fall of an elected government and strengthened regulatory oversight by the central bank. The Bank of Greece itself became independent in the 90s, in conformity with EU requirements and the country’s pursuit of EMU entry.

Entry into the EMU has also enabled Greece to attain a much more productive relationship with its expatriate element. In particular, EMU-driven reforms in telecoms and in banking have put in place the necessary infrastructure for Greek-owned shipping, the largest fleet in the world, to repatriate itself in Piraeus and in Athens. This has boosted the critical services component of our economy in shipping itself as well as through investments of the surplus cash of Greek shipping in banking and real estate in Greece and, increasingly, in the wider region. In that respect the deeply political choice of EU membership has over time helped reassert deep, centuries-long undercurrents in Greek economic life.

So what lies ahead?

My prediction is that if Turkey sustains its EU accession process, that will polarize the two countries’ complementarities ― that is to say, Turkey will be exporting to Greece an ever rising amount of goods and Greece will be exporting to Turkey, as an investor, an ever rising amount of capital.

A durable EU accession process would probably entrench low inflation in Turkey. That would give Turkish manufacturing a much more stable planning outlook and the cheaper funding it needs for its capital expenditures. The country’s already solid manufacturing base will be upgraded as a result and its exporting capabilities greatly strengthened. This same scenario ― of a durable EU accession process ― would also mean a more effective privatization program due to the enhanced legitimacy of the Turkish government and the greater attraction of Turkey to foreign direct investors. Turkish conglomerates in a low-inflation environment would also be compelled to rationalize and dispose of non-core activities, which would also present investment opportunities to investors from abroad.

Greek investors, in turn, are well prepared, due to their solid capitalization, their decade-long experience of internationalization in the Balkans and the country’s inherently superior affinity to the Turkish environment, compared to that of other foreign entities, to take advantage of the opportunities that will be made available. More specifically, Greek companies in services have the capital that is currently unavailable in Turkey and the know-how that Greece’s higher per capita income and more stable economy have brought into being. I believe that for the more extrovert Greek companies, Turkey, in the context of its EU accession, will be seen as one of their major strategic opportunities, if not the main one.