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Week Ahead (15 May)



W/C Monday, 15 May – Heated political climate in Turkey to intensify ahead of run-off Presidential election on 28 May

Yesterday, Turkey held parliamentary and presidential elections, the first since 2018. With 92% of votes counted, President Erdogan of the AKP won 49.49%, with his main rival Kemal Kilicdaroglu trailing behind with 45%, failing to meet initial expectations. Since neither candidate received over 50% of the vote, a second-round run-off election will take place on 28 May.

In its first decade of rule, Erdogan’s AKP delivered rapid economic growth and helped lift out of poverty a large segment of the population previously marginalised by the secular elites. However, since 2013 the country has been sliding back into authoritarianism, with President Erdogan stepping up his crackdown on dissidents following an unsuccessful coup against his rule in July 2016. Meanwhile, Turkey’s relations with the US and the EU have soured, partly due to Ankara’s growing ties with Russia, its assertive foreign policy in its neighbourhood, and its inflammatory rhetoric against fellow NATO member Greece.

Furthermore, in recent years Turkey has been facing increasing unemployment and inflation, largely due to Erdogan’s economic mismanagement, including his tight grip on monetary policy and his unorthodox belief in low-interest rates as a means to curb inflation. Last October, inflation reached a record 25-year high of 85.5%. Although overall inflation has dropped below 50% in the previous month, food inflation remains a persistent structural issue, reaching 67.8% in March. To ease inflationary pressures on its base of supporters, the government raised the minimum wage by 55% ($455) in December. Additionally, Erdogan has now promised to create six million jobs in case he gets re-elected. The main opposition, an alliance of six parties led by Kilicdaroglu, has promised to stabilise the economy, steer the country back into a more pro-Western and democratic stance, and revive the country’s EU accession talks.

As for the parliamentary elections, Erdogan’s AKP and his nationalist MHP ally are heading for a majority of seats, according to the latest figures. The impending run-off in the presidential election has raised questions about the 5% of votes garnered by ultranationalist candidate Sinan Ogan, who has expressed openness to negotiations with both Erdogan and Kilicdaroglu. However, any potential agreement would require sidelining the main pro-Kurdish movement, which supports Kilicdaroglu's candidacy, adding complexity to the outcome.

Although Kilicdaroglu’s victory in the Presidential elections could lead to a calming of tension between Turkey and the West, it is far from guaranteed that it would lead to a compromise on the thorniest bilateral issues. Also, it is unlikely that EU capitals would be keen to restart EU accession talks, as momentum seems to have been lost. Should Erdogan secure victory in the run-off, the significant majority obtained by his right-wing alliance in the concurrent parliamentary election would allow him to maintain firm control over the economy and other facets of Turkish society.


W/C Monday, 15 May – EU member states to agree on 11th sanctions package against Russia

EU member states are expected to reach an agreement on the 11th package of sanctions against Russia by the end of this week. Ambassadorial talks have been taking place since Wednesday, after the President of the European Commission, Ursula von der Leyen, unveiled the proposed package last week.

The new set of measures focuses on tackling sanctions circumvention and aims to address the issue of "third" countries that are finding ways to bypass current sanctions. Notably, the proposed sanctions introduce counter-measures against these countries helping Russia dodge the EU's trade embargo. This means that for the first time, sanctions could target companies from countries beyond Russia, including Iran and China. Central Asian countries such as Uzbekistan and Kazakhstan are expected to be the first targets. Although the proposal is not as tough as the U.S extraterritorial sanctions, it aims to step up diplomatic pressure on countries that have done little to cut the flow of goods to Russia. Nevertheless, some EU diplomats are cautioning against the proposal, citing political risks and warning that it could push third countries toward Russia or China.

Furthermore, the proposal includes phasing out an exemption that allows Germany and Poland to import crude oil from Russia through the Druzhba pipeline. Berlin and Warsaw were previously granted temporary derogations to import Russian crude through the northern section of the pipeline, but the draft proposal confirms that these exemptions will now come to an end. While Poland has already been cut off from supplies through the pipeline, Germany has agreed to import oil from Kazakhstan instead. The exact timing of its enforcement will depend on negotiations among EU countries.


Monday, 15 May – Eurogroup to discuss digital euro and CBDCs with finance ministers outside the euro area

Today, finance ministers from non-euro countries are convening with the Eurogroup to discuss and address potential operational challenges that may arise from cross-border payments involving central bank digital currencies (CBDCs). This will be part of a series of discussions organised by Eurogroup President Pascal Donohoe in response to the European Central Bank’s (ECB) development of a digital euro.

Sweden, being closest to launching a digital version of its own currency (krona), could dominate the discussion alongside ECB representatives. Concerns may also be raised about China's progress in issuing CBDCs. Even though the Bank for International Settlements has highlighted the benefits of CBDC interoperability, offering faster and cheaper cross-border transactions, risks exist, such as foreign CBDCs becoming more popular than national currencies, posing challenges for central banks. In the Czech Republic, the issuance of loans in euros surpassed the Czech koruna for the first time, highlighting the potential influence of foreign currencies.

Meanwhile, the European Commission has pushed the date out for publication of a legal framework for the digital euro, as well as a separate bill on legal tender, which would cover the question of a CBDC – this is now scheduled for 28 June instead of 24 May, as initially planned.

Tuesday, 16 May – Eurostat flash GDP and employment estimate for Q1 2023 to be released, expected to confirm projection of sluggish growth

On Tuesday, Eurostat will release its latest flash estimate of GDP and employment statistics for Q1 2023. According to the preliminary flash estimate for Q1 2023 released by Eurostat on 28 April, GDP increased by 0.1% in the euro area and by 0.3% in the EU, compared with the previous quarter.

Among the member states, Portugal (+1.6%) recorded the highest increase compared to the previous quarter, followed by Italy, Spain, and Latvia (all +0.5%). Declines were recorded in Ireland (-2.7%) as well as in Austria (-0.3%). The year-on-year growth rates were positive for all countries except for Germany (-0.1%).

Although these figures signal a seasonally adjusted GDP increase of 1.3% in both zones compared to the same quarter last year, the eurozone’s continuous growth is far from certain, with the ECB walking on a tightrope in interest rates. On 4 May, ECB announced a 25bp hike, following six consecutive 50bp hikes. Meanwhile, core inflation in April fell for the first time in 10 months in April to 5.6%, down from 5.7% the previous month. Although this is still over twice the ECB’s medium-term target of 2%, the lower figure has increased hopes that it has now peaked. In this case, the Eurοzone could perform better than originally projected in 2023, also largely thanks to the lower energy prices. In February, the European Commission revised upward its own forecast predicting 0.9% growth in the euro area, instead of the 0.3% predicted last November.

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