Greece versus Turkey: It’s the exchange rate exchange rate regime stupid!

A history of political dysfunctionality, corruption, military coups, military conflict with a neighboring country, large current deficits and weak fiscal management.

Greece fits that description perfectly well, but so does Turkey. So why don’t we have a major crisis in Turkey and why is Turkey not on the brink of default when neighboring Greece is?

The answer is simple – It’s the exchange rate exchange rate regime stupid!

In 2001 Turkey was forced by a major crisis to abandon it’s managed/crawling peg regime and instead introduced a floating exchange rate regime and the Turkish central bank introduced an inflation targeting regime.

14 years later Turkey is still in many ways politically dysfunctional – in fact it has gotten worse in recent years – there has been rumours of plans of military coups, there has been major corruption scandals even involving the Prime Minister (now president Erdogan) and the governing AKParty and lately the civil war in Syria has created a massive inflow of refugees and increased tensions with Turkish Kurdish population.

All this has to a large extent been reflected in the value of the Turkish lira, which have been highly volatile since 2001 – and increasingly so since 2008, but the floating exchange rate regime means that we have not seen the same kind of volatility in the domestic Turkish economy, which was so common prior to 2001.

While Turkey in 2001 floated the lira Greece gave up having a monetary policy of its own and instead joined the euro. We know the story – while the first years of euro membership in general was deemed succesfull that hardly has been the case since 2008: The economy has collapsed, unemployment increased dramatically, debt has skyrocketed, we effectively have had sovereign default and we are on the brink of an euro exit.

Milton Friedman used to say “never underestimate the importance of luck of nations” referring to how pegged exchange regimes might be succesfull for a while, but also that it could have catastrophic consequence to maintain a pegged exchange rate regime.

In 2008 Greece ran out of luck because it made the fatal decision to join the euro in 2001. Today is it blatantly obvious that Greece should have done as Turkey and floated the drachma. It now seems like after 14 years Greece will be forced by a major crisis to do exactly that.

Greece Turkey GDPcapUSD



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  1. samo794

     /  July 7, 2015

    well written, clear chart

  2. Max

     /  July 8, 2015

    Turkey is one of the many countries in a monetary gray area. They don’t have a hard peg, but the central bank gives the exchange rate significant weight when making decisions.

  3. Bulgaria, the third tourism country in that area, pegs for years and years to the euro. Do they have more productivity gains, so that they do not need to devalue?
    Is it really the exchange rate or can one devalue internally and keep wage rises contained?

  4. Ewan

     /  July 9, 2015

    What do you make of the argument by Robert L. Hetzel, at the Richmond Fed, that Greece does not have the option of a return to the drachma because the euro would continue as a parallel currency, which would be preferred given the expectation of drachma depreciation, and which capital controls would not be sufficient to obviate (given the option to deposit payment in euros offshore)? The only options comprise some combination of debt write-downs and structural reform.

  1. Greece’s continued suffering | The Market Monetarist
  2. Europe's delusional economic policies | Credit Writedowns Pro

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