Week Ahead (29 May)

W/C Monday, 29 May – Erdogan secures historic victory in Turkish presidential run-off, economic challenges persist

Yesterday, Turkey held its run-off presidential election. With 99.43% of the votes counted, President Erdogan of the AKP won 52.14%, with his main rival Kemal Kilicdaroglu trailing behind with 47.86%, despite being backed by a six-party alliance which had promised to stabilise the economy and steer the country back into a more pro-Western and democratic stance. In the initial round of voting that took place on 14 May, Erdogan achieved a lead of nearly five points over Kilicdaroglu. However, he did not meet the required threshold of 50% needed to secure an outright victory. Last week, Sinan Ogan, the ultranationalist candidate who secured third position in the first round of Turkey's presidential election by winning 5% of the votes, endorsed Erdogan, further boosting the latter’s victory prospects.

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 Erdogan stepping up his crackdown on dissidents following an unsuccessful coup against his rule in July 2016.

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, the Turkish President has now promised to create six million jobs. In his victory speech yesterday, Erdogan once again reiterated fighting inflation among his government’s main priorities, alongside stepping up relief efforts for victims of the devastating earthquake on 6 February in the Turkish-Syrian border region.

Erdogan’s victory in the run-off, coupled with the significant majority obtained by his right-wing alliance in the parliamentary election of 14 May, will now allow him to maintain firm control over the economy and other facets of Turkish society. It remains to be seen whether his reelection will prompt him to continue his government’s balancing act between the West and Russia or push him towards a less assertive foreign policy, prioritising the need to stabilise the floundering economy.

W/C Monday, 29 May – Centre-right Popular Party emerges victorious in Spanish local elections

On Sunday, municipal and regional elections were held across Spain. The local elections took place only a few months before the general elections, expected to be held by 10 December.

Spain's governing Socialist Workers' Party, led by Prime Minister Pedro Sanchez, suffered a major setback as it lost control of several regions and cities. The conservative Popular Party (PP) emerged victorious, with majorities in Madrid, La Rioja, Aragón, Valencia, Extremadura, and the Balearic Islands. Yet, to secure control in some regions, the PP may need to form coalitions or seek informal support from the far-right Vox party, which doubled its vote share compared to 2019.

Yesterday’s election results are seen as a significant boost for PP leader Alberto Nunez Feijoo ahead of the upcoming general election scheduled for the end of the year. The PP capitalised on the decline of the Ciudadanos party, which faced near-extinction in these elections. The outcome indicates that the conservatives could dislodge the left-wing coalition led by the Socialist Party in the national elections. As things stand, the PP looks set to return to power in December, leading the polls by a margin of 7%, despite a positive overall economic outlook and a series of recent governmental policies, such as higher minimum wages and basic income enjoying broad popularity.

Yesterday’s results also revealed a return towards a two-party system, with the Socialist Party and the PP dominating the political landscape, marking a shift away from the influence of smaller parties such as Podemos and Ciudadanos.

Tuesday, 30 May – Wednesday, 31 May – EU-U.S Trade and Technology Council to meet

This week, the EU-U.S Trade and Technology Council (TTC) will be held in Luleå, Sweden. The TTC was launched in 2021, aiming to coordinate transatlantic approaches to global trade, economic and technology issues, and to promote ‘’democratic, market-oriented’’ values.

The fourth TTC is expected to focus on ongoing export controls and sanctions against Russia, efforts to collaborate on global telecommunications, including 6G, and AI standards, ways to remove digital trade barriers between the two economic blocs and increase security in supply chains, specifically for semiconductors. The two blocs are also expected to announce new plans for closer collaboration on the green transition of their economies, including outlining ways for European automakers and suppliers to benefit from subsidies in the €360 billion U.S Inflation Reduction Act.

Nevertheless, the upcoming Council will not include an agreement on critical raw materials, due to a recent diplomatic dispute over the specific details of the deal. Another important issue of potential conflict is the trading relationship with China. Although most recently the EU has stepped up its efforts to reduce reliance on China for technological goods and critical raw materials, it still lacks a common approach vis-a-vis Beijing. Once again, Washington is expected to use the TTC in order to urge the EU for greater support in its technological competition with Beijing. However, the EU officials appear to be more focused on using the Council to promote transatlantic trade rather than taking a confrontational stance against China.

Overall, there is an ongoing debate on the scope of the TTC and on whether it should focus on dealing with major outstanding bilateral trade issues, such as data privacy, or deal with more ‘’forward-looking’’ policies of common interest, such as the implications of China’s rise. Critics have also argued that the next TTC will have to deliver substantial and more tangible outcomes in order to keep its momentum.

Thursday, 1 June – Eurostat flash inflation estimate for May

On Thursday, Eurostat will publish flash inflation data for May 2023. In April, Eurozone inflation was 7.0%, up from 6.9% the previous month but down from a peak of 10.6% in October. However, core inflation witnessed a slight dip to 5.6% from 5.7%, falling for the first time in 10 months.

Although this is still significantly above ECB’s medium-term target of 2%, the latest drop in core inflation has increased hopes that it has now peaked. Earlier this month, ECB announced a 25bp hike, following six consecutive 50bp hikes which have yet to work their way through the economy. Last Wednesday, ECB’s President Christine Lagarde once again pledged to reduce high inflation, indicating that there are more rate hikes to be expected in the coming months. Additionally, Bundesbank President Joachim Nagel recently stated that ‘’several’’ interest-rate hikes are still needed, confirming projections that monetary policy tightening has not yet come to an end. Last Thursday, his Slovenian peer, Bostjan Vasle followed suit, reiterating that further interest rate increases will be needed.

A second continuous drop in core inflation will further boost confidence that the Eurοzone could perform better than originally projected in 2023, also largely thanks to lower energy prices.