Chapter 17- Economic and Monetary Policy

Content of the Chapter

The Chapter on Economic and Monetary Policy mainly covers the independency of central banks in Member States, prohibition of monetary financing of public sector by central banks and prohibition of privileged access of the public sector to financial institutions.

The legislation in this area is arranged mainly by the Article 119 (Ex-Article 4) and Articles 120-144 (Ex-Articles 98-124) under “Economic and Monetary Policies” Chapter.

In addition to the legislation in this area, alignment with the principle of open market economy based on free competition, single currency policy and the price stabilization targets compose the basis of this chapter.

The framework of coordination in the area of economic and monetary policy is set by the Economic and Monetary Union (EMU). In the context of EMU, Member States are expected to harmonize their economic policies gradually and are subjected to the financial surveillance conditions of the Stability and Growth Pact. Moreover, candidate countries are expected to accept Euro as their unit of currency after accession by achieving alignment with the following Maastricht Convergence Criteria:

1. Inflation: Inflation rate in a Member State should not exceed more than 1.5 percentage points the average rate of the three EU member states with the lowest inflation over the previous year.
2. Budget Deficit: Budget deficit of a Member State should not exceed 3 percent of gross domestic product (GDP).
3. Public Debt: Public debt stock in a Member State should not exceed 60 percent of GDP.
4. Interest Rate: Long-term interest rates should not exceed more than 2 percentage points the rate in the three EU member states with the lowest inflation over the previous year.
5. The national currency is required to enter the ERM-II (exchange rate mechanism) 2 years prior to entry in Euro Area.

Monetary Union is a natural complement of Single Market. In order to increase the efficiency of the Single Market, which allows free movement of people, goods, services and capital within the Union, the costs of foreign exchange transactions and exchange rate uncertainties should be eliminated. 

After the global financial crisis of 2008, there have been crucial changes in the economic governance of the EU. In this regard, the conditions of the Stability and Growth Pact have been strengthened via Six Pack, Two Pack, Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (Fiscal Compact) and a stricter fiscal surveillance mechanism has been introduced. Moreover, new mechanisms such as European Semester have been created to improve economic policy coordination within the Union.  

As part of the EU's pre-accession economic surveillance procedure, candidate and potential candidate countries prepare and submit their Economic Reform Program (ERP) to the European Commission annually. Then, the Commission publishes its horizontal assessments on the ERPs of all candidate and potential candidate countries and its assessment on the country's ERP. Later, the Joint Conclusions of the Economic and Financial Dialogue between the EU and the Western Balkans and Türkiye, which includes country-specific policy recommendations, is adopted.

This chapter is closely related with Copenhagen Economic Criteria (existence of a functioning market economy and capacity to cope with competitive pressures and market forces within the Union). Therefore, the progress achieved in the context of this Chapter also has positive repercussions for fulfilment of economic criteria. 

Current Stage of the Negotiations on the Chapter

Türkiye’s Negotiation Position Paper on the Economic and Monetary Policy Chapter, which was decided to be opened on 24 January 2007, was transmitted to the EU side on 9 March 2007. Since it is asserted by France in the EU Summit on 26 June 2007 that this Chapter has direct relationship with full membership, Türkiye’s position paper on this Chapter has not been discussed and the Common Position of the EU has not been prepared. 

With the French reorientation, efforts for opening the Chapter to negotiations have been accelerated in 2015 and Türkiye’s Negotiation Position Paper on Economic and Monetary Policy, which was updated in the light of developments since 2007, has been submitted to the EU on 20 March 2015. The Common Position of the EU was received on 30 November 2015. 

The Chapter was opened to negotiations with the Intergovernmental Accession Conference on 14 December 2015. Türkiye’s institutional framework including organizational and human resource infrastructure necessary to implement the acquis in the framework of this chapter is in place. Whereas there were no opening benchmarks for the Chapter, following closing benchmarks are set in addition to the full, non-discriminatory implementation of the obligations of the Additional Protocol to the Association Agreement, for this Chapter:

Closing Benchmarks:

1. Türkiye has aligned its legal framework in order to ensure full central bank independence, the prohibition of monetary financing of the public sector, the prohibition of privileged access by public authorities to financial institutions, and the full integration of its central bank into the ESCB, including the compatibility of the central bank's objectives with the objectives of the ESCB.

2. Türkiye has aligned its legal framework in order to ensure compliance with requirements for national budgetary frameworks as laid down in Council Directive 2011/85/EU.

Türkiye has been annually preparing and submitting Pre-accession Economic Programmes (PEP) and Fiscal Notifications to the EU since 2001. Pre-accession Economic Programme, which is prepared in coordination of Ministry of Development with the contributions of relevant Ministries and institutions before, renamed as pre-accession National Economic Reform Programme (ERP) as of 2015. In the new Presidential Government System, Economic Reform Programme is prepared in coordination of Strategy and Budget Directorate of the Presidency with the contributions of relevant institutions. Fiscal Notification Tables [1] presenting data on budget deficits and government debts are prepared in coordination of TUIK. After the submission of these documents, Economic and Financial Dialogue meeting between the EU and the Western Balkans and Türkiye is being held each year. In this meeting, Joint Conclusions which include evaluations and country-specific recommendations for the country economies is accepted. There is a series of preparatory meetings before this meeting in order to finalize the joint conclusions (Employment Committee–EMCO, Economic and Financial Committee Alternates- EFC-A, Economic Policy Committee-EPC, Economy and Financial Committee-EFC). The issues related to this Chapter are also handled at the sub-committee no 4 on economic and monetary issues, capital movements and statistics every year.  

In order to achieve its economic policy objectives including sustainable growth, equitable income distribution and competitiveness in global scale, Türkiye aims at meeting the Maastricht Criteria and achieved a good progress in this context. As of today, Türkiye meets the criteria regarding budget deficit and public debt. 

Türkiye has achieved significant progress particularly in the area of Central Bank independence with the amendments of the Central Bank Law in 2001. Central Bank has absolute autonomy in exercising its powers and carrying out its duties.

With the adoption of the new Insurance Law No 5684 in 2007, some progress has been achieved regarding the prohibition of privileged access by the public sector to financial institutions.

The Central Bank of Türkiye changed its profit and loss calculation method related to foreign exchange purchase and sale transactions to “average cost method”, in accordance with the “Guideline of the European Central Bank on the Legal Framework for Accounting and Financial Reporting in the European System of Central Banks” in 2010.  Banks are no longer required to keep a certain amount of compulsory reserves in the form of Turkish Treasury bonds.

Article 41 of the CBRT Law was amended by Law No. 6111 dated 13.02.2011, to ensure financial independence of the CBRT, is in line with the requirements of the EU Acquis.

In general, Türkiye’s level of preparedness is advanced in the context of Economic and Monetary Policy Chapter.

Relevant Subcommittee Meetings

Subcommittee No 4 on Economic and Monetary Issues, Capital Movements and Statistics

Links

For detailed information about state of play of European economic governance and new mechanisms:

http://ec.europa.eu/economy_finance/economic_governance/index_en.htm

For Maastricht Criteria:

http://europa.eu/legislation_summaries/glossary/convergence_criteria_en.htm

For information about EU's policies and legislation on economic and monetary affairs:

http://europa.eu/legislation_summaries/economic_and_monetary_affairs/index_en.htm

For "Reflection Paper on Deepening Economic and Monetary Union" by Commission:

https://ec.europa.eu/commission/publications/reflection-paper-deepening-economic-and-monetary-union_en

For European Commission Directorate General for Economic and Financial Affairs:

https://ec.europa.eu/info/departments/economic-and-financial-affairs_en

Screening Process

Presentations at Explanatory Screening Meeting (16 February 2006) 

Presentations at Bilateral Screening Meeting (23 March 2006)

Screening Report 

[1] Türkiye revised its national account system to comply with the European System of National and Regional Accounts (ESA-2010). However, ESA-2010 has not yet been implemented for government accounts.