The expulsion of ten Western ambassadors, including the German and American ambassadors, ordered by Turkish President Recep Tayyip Erdogan at the weekend, represents a further escalation of tense political relations that will also affect business.

The Turkish lira continues to lose value in the extremely nervous currency markets.

The dollar marked a new record high at 9.8545 lira at the beginning of the week.

Andreas Mihm

Business correspondent for Austria, East-Central and Southeastern Europe and Turkey based in Vienna.

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After the central bank's surprisingly significant interest rate cut last Thursday, the Turkish currency fell to new historic lows. Most recently, 9.60 lira had to be paid for one dollar and 11.18 lira for one euro, around 20 percent more than a year ago. Turkey traditionally has a high current account deficit, which it finances with foreign currency loans.

"With his statement Erdogan is only increasing the pressure on the Turkish foreign exchange and debt capital markets, which are already being tested by several stress factors," Dennis Shen, director of the Scope rating agency, told the FAZ at the weekend.

The markets are already extremely tense because of the foreseeable increase in American monetary policy and the "out of control inflation and significant monetary policy errors" in Turkey.

Erdogan's announcement is also dangerous because the expulsion could lead to countermeasures by the USA and the EU, which could increase Turkey's political isolation and the lack of reliable economic partners in times of financial need.

The crisis is coming to a head

The dispute over human rights activist Osman Kavala, who has been in custody for four years and whose release the European Court of Human Rights demanded in 2019, increases doubts about the rule of law in Turkey, which is also important for companies and investors. Erdogan's threat escalates his crisis-ridden relationship with the liberal democracies.

The differences range from the financing of the millions of Syrian refugees hosted by Turkey - a further round of financing by the EU is just around the corner - to the acquisition of Russian missile defense systems by NATO member Turkey, which has been sanctioned by America, to the ongoing conflict with the EU over exploitation the gas reserves in the Mediterranean, which Turkey claims for itself. The EU is by far Turkey's largest trading partner, and here, in turn, Germany takes a leading role, but here too, despite close ties, many things are not going well. Negotiations have been unsuccessful for years about the modernization of the customs union, which is urgently required by business.

Other points of contention, which are often not widely debated, but are no less important economically, cloud the relationship of trust.

Just last week, for example, an American court confirmed the admissibility of proceedings against the Turkish state-run Halkbank for illegal Iran business, and an OECD financial market working group had put the country on the gray list of heightened observation because of inadequate measures to combat money laundering - under angry ones Protests in Ankara.

Tourism is suffering

That could further scare off international investors who have invested less and less money in Turkey in recent years.

It is true that the important export economy is benefiting from the lira falling continuously.

But the equally important tourism sector is also suffering in the second year of the Corona crisis.

The population suffers from a high unemployment rate, which unions place well above the official rate of 12.1 percent.

The official inflation rate is 20 percent, the rate of food inflation even 30 percent.

Under pressure from Erdogan, the central bank cut interest rates to 16 percent.

In doing so, it contradicts its monetary policy guidelines and pumps more money into the market.