BRUSSELS, Aug. 15 (Xinhua) -- The Turkish lira has been under significant pressure in recent weeks amid U.S.-Turkey tensions over continued detention of an American pastor in Turkey. Instead of pursuing a compromise, Turkey declared on Wednesday morning that the government had raised tariffs on U.S. imports, including passenger cars, tobacco and alcohol.
As the Turkish lira has fallen over 40 percent in value so far this year, European economists are revealing how the financial meltdown in Turkey will affect the neighboring European Union (EU).
"MANAGEABLE" RISKS FOR BANKS
Economists with Brussels-based think tank Bruegel believe a financial crisis in a neighbor country of the EU could have a direct negative impact on the EU economy, mainly through the exposure of its banks operating in Turkey (in particular from Spain, France, Italy and Germany) and through trade with Turkey.
"Compared to the size of the European economy, these exposures to Turkey are relatively small and should be manageable. However, even though the European recovery started in 2013, some European countries are still vulnerable -- as could be seen in the reactions of bond markets for Greece and Italy," read an article co-authored by Gregory Claeys and Guntram B. Wolff.
The two economists believe the economic ripple effects of a possible deepening of the crisis in Turkey should be manageable for the EU with Turkey's gross domestic product (GDP) standing at roughly 900 billion U.S. dollars.
JPMorgan also describes the Turkey risk for Europe's banks as "significant but manageable."
REFUGEE DEAL & GEOPOLITICAL CONSIDERATIONS
Some Europeans also fear Turkey's crisis could endanger the EU's refugee deal with Ankara. Turkey is a transit country for many refugees and economic migrants who want to come to Europe from the Middle East and Asia. The EU has a deal in place with Turkey on Syrian refugees. There are worries that political knock-on effects may result in changes in Turkey's migration policy.
However, there are European experts who believe that's unlikely because Turkey needs hard currency now more than ever.
Finally, geopolitical considerations are also important for the EU. Turkey has been a NATO ally since 1952 and has for a long time played an important supporting role in the Middle East for western countries. Moreover, Turkey is still officially an EU accession country. However Turkey's President Recep Tayyip Erdogan has announced that his country could turn its back on the West and look for new allies.
"Turkey might find it difficult to identify other allies that would be able to fund it in case the crisis deteriorates strongly. However, that view presupposes a rational approach to the situation. So the EU should be carefully considering the geopolitical threat, as it would obviously have strong implications for the EU," wrote Gregory Claeys and Guntram B. Wolff.