The warning signs have been there for more than a year, but in the past week Turkey has been hit by a financial crisis that, coupled with a tense stand-off with the United States, threatens to wreak havoc on the country. The lira has gone into freefall, with a 14 per cent drop recorded last Friday alone. Inflation has hit 15- 16 per cent, and a pledge by the central bank that it would take "all necessary measures" to maintain stability appeared to do little to calm the turmoil.
President Recep Tayyip Erdogan remains dogmatically opposed to the conventional response to a falling currency – higher interest rates – while his own actions, notably the appointment of his son-in-law as finance minister, have exacerbated the crisis by raising fears about political interference at the central bank.
Turkey's economic problems are of its own making, but Trump's move prompted Erdogan to place the blame squarely on Washington.
Erdogan’s culpability goes deeper, however. On his watch, Turkey has run up a current account deficit, which, combined with high levels of debt in the private sector and an overheated property sector, has left the economy vulnerable. Erdogan’s increasingly authoritarian rule, underlined by his outrageous crackdown in the aftermath of the failed coup in 2016, and his aggressive positioning in the Syrian civil war, have spooked investors and rattled many of Turkey’s allies.
Instead of taking steps to restore confidence, Erdogan, who dismissed the fall of the lira as “a storm in a teacup”, has fallen back on conspiracy theories and nationalist slogans, portraying the crisis as a foreign plot to destabilise Turkey.
The latest rout was precipitated by Donald Trump's announcement on Friday that he was doubling US import tariffs on Turkish steel and aluminium. By hitting Turkey when it's down, Trump is attempting to pressure Ankara into releasing an American pastor, Andrew Brunson, who was charged with espionage and other crimes – charges he and US officials reject – in the aftermath of the failed coup.
Talks to secure Brunson's release have gone nowhere. Turkey's economic problems are of its own making, but Trump's move prompted Erdogan to place the blame squarely on Washington. The US was swapping "a strategic partner in Nato for a pastor."
The Turkish president has miscalculated. He may threaten to go elsewhere in search of allies, but ultimately he is in a battle he cannot win against the US. What is required is not geopolitical grandstanding but solid economic measures to halt the lira sell-off.
That will mean cooling the overheating economy, taking action to deal with rising prices and easing tensions with the US. In other words, if Turkey is to climb out of its current crisis, Erdogan will need to show some humility and admit his mistakes. Sadly, nothing in his record so far suggests he is capable of that.