The new Turkish government is only just taking office and -- in the expansive and often, ultimately, expensive way of the financial markets -- is being hailed a success.
It is "the most market-friendly government possible," according to analysis published this week by JP Morgan.
Turkish debt and the stock market have risen strongly since the Justice and Development Party, or AKP, won a decisive victory in the Nov. 3 election. Yet the challenges that it faces are great and not all the signs are positive.
Recep Erdogan, the AKP leader, has pleased markets by showing moderation. He couldn't become prime minister because he is barred from holding public office, having been sent to jail for four months in 1999 for "inciting hatred" by reciting in public a classic poem that emphasized Turkey's Islamic roots. Who Erdogan would choose as the prime minister was one of the markets' main preoccupations.
At the weekend, he inspired confidence by appointing 53-year-old Abdullah Gul, the No. 2 figure in the AKP, and an economist who worked previously for the Islamic Development Bank.
Gul has "always been the voice of moderation" in a succession of parties with Islamic credentials, according to Yasemin Congar, the Washington correspondent of the Turkish daily, Milliyet.
Gul's appointment was itself a sign of Erdogan's confidence, Congar believes, because Erdogan, whom Congar describes as "a very charismatic leader," was not scared to appoint a major figure and a man with a constituency of his own within the AKP.
A second appointment that charmed the markets was that of the 35-year-old Ali Babacan as economy minister. He is well-known to Western investors because he participated in road shows by the AKP in the West before the election.
He was educated in the United States, with an MBA from Northwestern University. JP Morgan describes his appointment as "the best proof of the AKP's determination to move forward with the economic program."
The program, an ambitious attempt to stabilize and modernize the Turkish economy, is a legacy from the previous government, led by the former prime minister, Bulent Ecevit.
Ecevit sought to make the economy sounder and more stable by reducing the fiscal deficit and inflation, limiting the government's debt, cleaning up the banking system and privatizing state entities. It has been a determined effort.
The government has an extraordinarily high fiscal surplus of 5 percent of gross domestic product at the "primary" level that excludes volatile interest payments on debt. But once those interest payments are included, the fiscal deficit is enormous: 15.8 percent of GDP in 2001.
Babacan is expected, however, to step neatly into the shoes of former economy minister, Kemal Dervis, who had worked previously at a senior level for the World Bank and was trusted by the multilaterals and financial markets.
What needs to be done now? From the financial markets' and the IMF's point of view, the priority is to keep making the effort to reduce inflation and the interest rate payable on domestic debt and thereby bring the fiscal position under control.
For, at present, as Tim Ash, emerging markets economist at Bear Stearns in London, told United Press International, "the debt ratios are awful."
To keep domestic debt servicing under control, the government needs to remain austere and avoid troubling the market. But the AKP has other priorities that might clash with the goal of austerity.
It wants, laudably enough, to reduce poverty, but the means rather than the end may trouble the market: It has talked of increasing state employment and spending.
These are instincts that it will have to keep in check, if it is to abide by the International Monetary Fund program and avoid alarming the markets.
To head in the opposite direction, towards a sustainable debt and fiscal position, Turkey needs, in Ash's view, a "positive confidence shock," the sort of fresh belief that would be generated by prospective membership of the European Union.
If Turkey were joining the EU, the so-called convergence trade would come into play. Spreads on Turkish debt would fall towards the Western European level. The government's interest bill -- about half of public spending at present -- would fall considerably. A virtuous circle would be put in place. But is EU membership a genuine possibility?
Several factors have ensured that Turkey is not among the 10 or so Central and Eastern European states considered likely to attain EU membership in 2004.
On the one hand, there is the economy. The annual inflation rate in Turkey was 33.4 percent in October. The effort to get the economy under control must be persistent before Turkey is likely to be considered a genuine candidate to join the EU club. On this score, it can be said that Turkey has been doing its homework, even if some more work is left to do.
It is social, political, and even geographical factors that are more difficult to tackle.
Lack of respect for human rights, the treatment of Turkey's Kurds, the dispute with Greece over Cyprus -- Turkey invaded the northern part of the island in 1974 -- have traditionally been seen as obstacles to Turkish membership of the EU.
There are some promising signs. A new U.N. proposal, issued on Nov. 11 by Kofi Annan, the U.N. secretary-general, proposes that the Turkish northern half of Cyprus and the Greek southern half form a confederation of two "component states," with a shared presidency that would rotate every 10 months.
The prospect that this proposal might be accepted by both sides is considered good, partly because the AKP is keen on membership of the EU and wants the obstacle of the unresolved Cyprus conflict removed. But a step forward in Cyprus will only be possible if the AKP can overcome opposition from its old enemies in the Turkish military.
Turkey's armed forces are part of an establishment that also includes civil servants, journalists and the judiciary, which wants to keep Turkey as a secular state, along the lines established by Kemal Ataturk in the 1930s. The military removed the coalition led by the Islamic Welfare Party from power in 1997.
In Cyprus, the military is unwilling to cede land to the Greek-Cypriot population, which is a part of the new proposal, and to reduce the number of Turkish troops posted in the island. Can the AKP overcome the objections of its traditional opponents?
Even if the Cyprus dispute can be resolved, there remain question marks over whether the EU will ever welcome Turkish membership.
The former French president and current head of the convention on the EU's future, Valery Giscard d'Estaing, brought into open the obstacles when he told the French newspaper Le Monde on Nov. 8 that Turkey's "capital is not in Europe, 95 percent of its population live outside Europe, it is not a European country."
For him, Giscard said, admitting Turkey to the EU "would be the end of the European Union."
Will these fears of admitting into the EU a country that sits on the divide between Europe and Asia and has a predominantly Muslim population be overcome? If not, Turkey will have to battle its way towards a sustainable fiscal and debt position without the help of the "confidence shock" of which Ash speaks.
And, within Turkey, too, there is a divide to be bridged. The political challenge for the AKP, a party in touch with the Islamic majority of the population but distant from its establishment, is a big one. The road ahead is a long and a difficult one. The markets' ebullience may not endure.
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