During the press conference, held at Dolmabahce Palace in Istanbul, Babacan said volatility on international markets has had a particularly significant impact on the Turkish economy over the past two months, contributing to a decline on the Istanbul Stock Exchange (IMKB) and the slide of the Turkish lira against leading international currencies. Since April, the IMKB has lost about 18% of its value, while the lira has dropped nearly 17% against the dollar, increasing the cost of imports and fuelling inflation.
Babacan went on to add that although it is impossible to know what the year-end figure will be, the government remains committed to fighting inflation. "We are going to miss the target for the end of this year, but we are not changing our figures for 2007 or 2008," he said. "We are trying to close this year with a single-digit figure."
"Of course, it is not guaranteed", he added. "We have to be ready for any future volatility. This is no atmosphere to relax or be comfortable." At present, year-to-date inflation in the consumer price index (CPI) stands at some 10.12%, while inflation in the producer price index (PPI) is slightly higher, at 11.68%. The government has an inflation target of 4% for both 2007 and 2008.
During the question and answer session, however, members of the foreign press seemed rather blasé about the government's plans to fight inflation. They were far more interested in grilling Babacan, who also serves as Turkey's lead negotiator in EU accession talks, over the country's refusal to open its ports to Greek Cypriot traffic.
Babacan took the opportunity to explain the Turkish government's position, stating that, according to their legal reading of the agreements that have been signed, Turkey has no obligation to grant access to Greek Cypriot ships and aircraft. He went on to stress that negotiations on the 35 "chapters" of the EU accession process were "technical, not political", adding that "using Cyprus to push Turkey is unfair".
Turkey is current under pressure from the EU to open its ports and airports to Greek Cypriot traffic by the end of the year as a part of its customs agreement with the bloc dating back to 1996. The Turkish government, in turn, argues that it will only do so after the EU moves to end the 30-year political and economic isolation of the Turkish Republic of Northern Cyprus (TRNC).
Just two weeks ago, Finnish Prime Minister Matti Vanhanen, whose country presently holds the EU's rotating presidency, warned that accession negotiations could be suspended under his watch unless Turkey meets all requirements, including extending the customs union to all 10 of the bloc's newest member states.
With the mood souring, Babacan hinted that some in Turkey have begun to perceive the EU as a less than honest broker. "The feeling of unfairness is quite widespread among Turks," he said. "The Turks are being asked to do more and more things unilaterally." He went on to add, however, that the consequences for the EU of killing Turkey's membership bid could be disastrous. "If it fails, very few people will blame Cyprus." Instead, Babacan said, many would take it as a message that "East and West don't mix". Without elaborating any further, he added that the impact in the Muslim world of a no" to Turkey from the EU "could be far beyond the imagination".
Alarmism aside, no one is suggesting that deadlock is inevitable. In fact, there has been recent progress on other fronts, with TRNC President Mehmet Ali Talat and Greek Cypriot President Tassos Papadopoulos meeting this past weekend in a UN-sponsored forum to discuss ways to restart talks on the future of the divided island. The two leaders managed to make some important progress, agreeing to a twin-track negotiation process whereby technical committees will try to resolve day-to-day problems, while more pressing and central concerns will be dealt with in parallel.
The move is not only a good diplomatic start, it is also a strategic one, as it could shift the locus of talks on the island's future from the EU, where Cyprus can extract concessions by wielding its veto power over Turkey's accession bid, back to the more impartial UN.
Following the weekend meeting, EU Enlargement Commissioner Olli Rehn hailed the move, saying that it could help to defuse a potential crisis with EU candidate Turkey. "Making progress on UN-led negotiations should make it possible to make progress in parallel on trade regulations to end the economic isolation of the Turkish Cypriot community," he said.
While progress on the Cyprus issue is by no means assured, the signs are at least starting to look positive. Though nothing has yet been worked out, a deal could have a dramatic and positive effect on Turkey-EU relations, as Cyprus remains one of the major stumbling blocks on the road to accession.