Turkey's ruling Justice and Development Party (AKP) made verbal submissions to the Constitutional Court yesterday in the closure case lodged against it in March. Aside from the political issues at stake, there is widespread belief that the case -- which could see the AKP closed for trying to establish an Islamist regime in place of the secular constitutional order -- is affecting the performance of the economy.
Prime Minister Recep Tayyip Erdogan and a significant number of his colleagues are liable to lose their parliamentary seats and to be banned from formal party office, prompting by-elections, if not a general election.
If this comes to pass, the AKP's large parliamentary majority and popular support may be sufficient to keep it -- or rather, a successor party -- in power. However, there are questions as to whether Erdogan would be able to hold onto the prime ministry; whether the AKP would suffer defections; what sanctions the EU would take against Turkey; and what new forms the battle between Islamists and secularists could take.
While it is unlikely that closure case has had more than a marginal impact on the economy so far, instability may upset the economy more seriously in the months ahead:
· The closure of the AKP and ensuing complications may not yet have been fully 'priced in' by the markets.
· Economic policy may increasingly be guided by considerations of short-term political popularity. In May, the government allowed the standby accord with the IMF to lapse and lowered the target for the primary fiscal surplus in order to subsidise employers' social security contributions and spend more on municipalities and regional development.
· Several other expansionary moves are under way or under consideration. These are arguably a response to the wider political situation as well as to the slowing economy and the approach of local government elections due in March 2009.
· Private and foreign investment may be deterred by fears that government will be weaker in years to come, potentially reducing the likelihood of efforts to make the economy more efficient and competitive. Politics may be one reason why ground-breaking tenders for the privatisation of electricity distribution in two major regions attracted only five bids each on June 10.
· There is a risk that Turkey's chances of attracting foreign investment from the Gulf region, currently awash with oil revenues, will be damaged for ideological reasons if the AKP is closed.
The economic situation may affect politics as well as vice versa. A weak economy could cost the AKP support among entrepreneurs and the electorate, and increase the likelihood of defections.