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Turkey in currency chaos: How Erdoğan's wishful thinking fuels inflation


With his very personal theory of money and currency, President Erdoğan is fueling inflation – a textbook example of irrational economic policy. But we, too, are victims of such self-deception.

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Purchasing power at risk: when low interest rates fuel inflation, low earners are the losers (street scene in Ankara end of May 2022)

Photo: SeongJoon Cho / Bloomberg via Getty Images

Recep Tayyip Erdoğan has an idiosyncratic view of the economy, money and currency.

He adheres to a kind of private theory that no serious expert shares: interest rates are bad in principle, so they should be as low as possible.

What's more, Erdoğan believes that rising interest rates are causing inflation.

This contradicts all experience and the findings of economics, which consider such an effect to be possible only in very special constellations.

But the Turkish President is convinced that interest rates must go down, then inflation will fall too.

Erdoğan has already fired several central bank governors because they could not deliver the desired combination of cheap money and stable prices.

A head of the statistics office also had to go.

None of this has changed anything: inflation in Turkey continues to rise.

Meanwhile, consumer prices are rising at an annual rate of 70 percent.

A disaster that causes enormous social hardship.

The middle classes are impoverished and the better educated are emigrating.

On Monday

there will be new inflation figures from the Turkish central bank.

It would be time for a change of course at the latest at the next monetary policy meeting at the end of July.


But the President does not believe in it - in the literal sense.

Erdoğan has repeatedly publicly stated that he does what religion demands of him.

As a conservative Muslim, he follows the Koran.

And because the Holy Scriptures of Islam condemn the charging of interest as usury, the central bank should not ask for any, if possible.

According to this interpretation, anyone who has to go into debt is in a predicament.

Money lenders, commonly known as banks, should not make any profit from this.

An argument that was also part of the canon of faith in the Christian Middle Ages.

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20-year high: Inflation rate in Turkey rises to 70 percent

In reality, however, low interest rates encourage borrowing.

Accordingly, credit growth has risen sharply in Turkey, which in turn fuels demand and causes prices to continue to rise.

Quite remarkable: In Turkey, a religious meta-narrative determines the management of money and currency.

In the G20 country of Turkey, faith triumphs over knowledge in a policy area that, for good reason, has been delegated to scientifically experienced technocrats in many countries.

A few lessons can be learned from this – also for the supposedly enlightened West, which, often unconsciously, follows its own grand narratives.

We, too, occasionally act on the basis of beliefs, the anchoring of which in reality leaves something to be desired - more on that below.

Inappropriate composure

Western central banks also make mistakes.

They have allowed the current surge in inflation to run inappropriately for too long.

The European Central Bank (ECB), with all its concentrated expertise, missed the right time to exit the lavish support measures of the corona crisis, just like the US Federal Reserve, the world's most important central bank.


out for the release of the June Governing Council meeting minutes on

Thursday .)

In fact, it is not easy to identify turning points in monetary policy, especially at a time when economic structures are changing rapidly, as is currently the case with the pandemic and the war in Ukraine.

How exactly the economic situation is developing and when a central bank should take countermeasures can hardly be determined exactly in real time.

The situation is further complicated by powerful interests that always oppose monetary tightening.

Raising interest rates quickly and preventively is never popular.

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Expensive bread, growing hunger: These countries are hit hardest by inflationBy Alexander Schreiber

In order to keep the central banks out of such political conflicts, they have been given institutional independence in many places over the past decades.

Autocrats, especially in emerging countries, are now in the process of subjecting the central banks to government policy again.

However, Turkey is a special case in that the politicization is religiously motivated.

Beliefs from times long past determine the course of a central bank that is supposed to watch over a modern monetary system in an open economy based on the division of labour.

A development that not only indicates how far the centralization of state power has progressed under Erdoğan, but also, quite fundamentally, how powerful the effect of religious narratives is, which can hardly be shaken even by harsh, contrary everyday experiences.

Inflation out of control

The OECD, a club made up of predominantly wealthy Western countries, recently warned the government in Ankara that the task now must be to "strengthen the independence of the central bank" and "to raise key interest rates".

In general, the "entire macroeconomic framework" must be stabilized.

Otherwise inflation threatens to spiral further out of control.

In fact, inflation in Turkey has long been chronic.

As early as the middle of the last decade, inflation expectations rose well above the official target of five percent - which shows how low the credibility of the Turkish monetary authority is.

The actual inflation rate was mostly higher than expected.

From 2017, prices across the board increased by more than ten percent per year.

In 2018 and 2019, inflation rates temporarily soared to over 20 percent before initially falling during the corona pandemic.

They have been rising all the faster since 2021, as calculated by the International Monetary Fund (IMF).

Now inflation is about to spiral out of control.

It's not just expensive food and energy that drives up price levels.

Life has long since become more expensive across the board.

The so-called core rate (excluding food and energy) increases by 60 percent at annual rates.

High inflation and the central bank's battered credibility are causing investors to flee: the exchange rate of the lira has collapsed.

The central bank has tried to counteract this by throwing currency reserves worth many billions of euros onto the market.

It was all useless.

The vicious circle of high inflation expectations, rising prices and a collapsing currency cannot be stopped without resolute interest rate hikes.

Since the beginning of last year alone, the lira has fallen massively.

Those who can keep their savings in euros or dollars.

In terms of Turkish currency devaluation, the two major western currencies are still stable in value.

Because of lower interest rates, Turkey's economy has borrowed a significant portion of its debt in either euros or dollars - which, given the falling currency, can bring financial crunches that snap painfully.

Up until the last decade, Turkey was an extremely successful country economically.

Now she is faced with an ugly scenario: If Ankara continues to follow the current course, the path towards currency reform is mapped out.

How can this actually happen?

Societies need narratives to exist

What is currently happening in Turkey is an economic tragedy that drastically demonstrates the damage that unsuitable economic beliefs can cause.

Mockery and cynicism are out of place.

Because we in the West are by no means immune to wrong conclusions that stem from actually good basic convictions.

Very fundamentally: no society can exist without meta-narratives - without deep, identity-forming narratives that define common values ​​and that are not questioned in principle.

Such narratives form the basic premises on which living together is based.

They can be religious, national or ideological in nature.

Who are we as a society?

What characteristics do we share?

To what extent are we different from other societies?

What do we consider right and what wrong?

Meta-narratives can be explicit and strict, as is the case in Erdoğan's conservative Islam or Vladimir Putin's aggressive nationalism.

But they can also resonate implicitly and vaguely beneath the surface of what is said, as is common in secular Western societies.


Henrik Mueller

Short-cut politics: How permanent outrage destroys our democracy

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Meta-narratives of a completely different nature form the humus from which concrete political convictions grow, especially in economic and social policy, where notions of justice and decency are central.

An example from a German perspective: Germany has been accumulating savings surpluses for 20 years, which it exports to the rest of the world.

This permanent outflow of capital (»current account surplus«) reduces our consumption and development opportunities.

Of course, the horrendous foreign assets are not driving us into an acute crisis.

But as a society, we pay a heavy price.

Nevertheless, this collective renunciation is not a big issue in Germany, not even among economists.

Why not?

I suspect it's because of our Protestant heritage, which focuses on work and thrift as core social values.

The same applies to the Netherlands and Switzerland.

The narrative of the »Swabian housewife«

Going into debt doesn't fit into our world view either.

An attitude that, in turn, stands in the way of greater eurozone fiscal integration – which is a prerequisite for the long-term stability of the currency and the internal market.

But the story of the EU, which "cannot be a transfer union," is just as popular in this country as Angela Merkel's metaphor of the (thrifty, presumably pietistic) "Swabian housewife," which she proclaimed to be the model of German financial policy.

The fact that sooner or later the monetary union will blow up in our ears, that schools, the armed forces and the rail network are in a deplorable condition, that we have watched over the years as hundreds of billions of euros in unused savings have flowed out of Germany - all of this is part of the Consequences of a meta-narrative-led politics.

Because identity-establishing fictions are more convincing than hard facts.

Meta-narratives set guidelines for thinking and acting.

On the one hand, this is good because they can contribute to civilizing people.

On the other hand, meta-narratives have the potential to mislead and blind entire societies to risks as well as opportunities.

With facts against errors and fictions?

There is only one tried and tested means against this: open discourse.

Established beliefs have to be critically questioned again and again and confronted with uncomfortable facts.

Otherwise societies go astray.

Freedom of opinion, freedom of the press and freedom of science are essential in order to bring our imagination into harmony with the reality in which we live today.

The Islamic ban on interest is a good example of this.

Most Germans would probably subscribe to the moral norm according to which it is not permissible to exploit people's predicaments for business purposes.

However, when low interest rates lead to high inflation, wage earners and savers also find themselves in dire straits through devaluation, through no fault of their own.

This constellation can also be interpreted as the exploitation of the weaker parts of society - although in this case the exploiter is the state.

So you could see things very differently than the President - and correct mistakes.

Unfortunately, freedom of the press and science is not in good shape in Turkey.

The most important economic dates of the coming week

Expand areaMonday

Ankara –


– The Turkish currency in free fall: The Turkish central bank is now publishing inflation figures for June.

Wiesbaden -

German economy

- The Federal Statistical Office presents new figures for export.


Neu-Isenburg -

Inflation adjustment

- Third round of collective bargaining for the employees of Volksbanken and Raiffeisenbanken.

Berlin –

Warming up

– The AfD parliamentary group shows the documentary »Teuro total – Deutschland am Limit«.

Actually not news, but populists, no matter how poorly equipped intellectually, can score points with the issue of inflation - as France's leading right-winger Marine Le Pen recently showed.


Frankfurt -

In a bind

- In its semi-annual press conference, the Association of the Chemical Industry reports on the existing challenges, including acute gas shortages.

Expand areaThursday

Wiesbaden -

Production at the limit

- New figures for production in industry.

Frankfurt –

Skinning the onion

– The ECB publishes the edited minutes of the last Council meeting.

The central banker community is eagerly awaiting it given the rushing inflation.


Washington -

US economy

- The US government will release data on the unemployment rate in June.


Beijing – sweet and


– China's statistical office announces the price development in China.

Source: spiegel

All business articles on 2022-07-03

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