Osman Şenkul
According to data released by the Turkish Statistical Institute (TurkStat) on 1 June, Gross Domestic Product (GDP) increased by 2.5 per cent in the first quarter of 2026; in other words, as of the end of the first quarter, annual economic growth was recorded at 2.5 per cent.
Looking at the components of GDP, during the same period, the agriculture sector grew by 4.6 per cent, trade, transport, accommodation and food services by 3.7 per cent, financial and insurance activities by 3.5 per cent, the construction sector by 3.2 per cent, and real estate activities by 3.0 per cent – all sectors that grew at a rate higher than the overall growth. However, we observe that growth in sectors closely related to social life lagged behind overall growth: professional, administrative and support service activities grew by 1.9 per cent and public administration, education, human health and social work activities by 1.8 per cent, whilst the industrial sector—which could be considered the backbone of economic growth—contracted by 0.8 per cent.
Consequently, the number of people in employment in the first quarter of 2026 fell by 301,000 compared to the previous quarter. As some of these individuals have ceased looking for work and are therefore classified as outside the labour force rather than officially unemployed, the official unemployment rate appears to have fallen to 8.1 per cent; however, the broad definition of the labour force—which includes time-related underemployment, potential labour force and the unemployed—rose to 30.4 per cent during the same period. This rate indicates that there are 13,265,000 people who actually wish to work or are in irregular employment.
The contraction of industry in Turkey generally signifies a decline in production, and whilst this may not be fully reflected in TurkStat data, it enables us to see that it forms the fundamental building blocks of the inflation that is rising day by day. Although the Ministry of Treasury and Finance has sought to suppress increases in pension payments and the minimum wage as much as possible, arguing that “demand must not rise, or inflation will rise even faster”, this contraction in industry reveals that the “supply” side of the equation is “not being taken very seriously”.
According to this approach, which is based on the claim that “suppressing wages and salaries will reduce demand”, the interest rates rapidly increased from 2021 onwards were also intended to “encourage people to deposit their money in the bank rather than spend it”. Yet the situation is clear: with wages and salaries being suppressed to levels below even the poverty line due to rising inflation, people are unable to repay the loans they took out just to survive. Consequently, citizens’ total debt to banks has exceeded 6 trillion lira, whilst the volume of non-performing loans (non-performing loans) has reached 712.7 billion liras, marking an 81.1 per cent increase as of May 2026.
Whilst pensioners and wage earners have fallen into this situation because they cannot repay their high-interest debts, it has been determined that our state’s central government budget will pay 2 trillion 742 billion liras in interest on public debt. For these interest payments, of which a total of 1.1 trillion lira was paid in the first four months alone, 10.6 billion lira is being paid out daily from the budget, and 440 million lira per hour. Calculations show that the state’s interest payments, which stood at 163 billion lira in January 2025, rose to 456 billion lira in January 2026.
All of this is attributed to the Central Bank of Turkey (CBRT) setting its policy rate well above even the inflation target, which is the key determinant of interest rates. Although the CBRT announced an inflation target of 16 per cent for 2026 in February, in April the CBRT set the overnight lending rate at 40 per cent and the overnight borrowing rate at 35.5 per cent. However, with the change made on 14 May, this target was raised by eight percentage points to 24 per cent. As can be seen, even if you were to restrict wage and salary increases as much as possible to curb demand, rapidly rising interest rates are suppressing production much more quickly; consequently, rather than reducing inflation, inflation targets are being forced to rise step by step as a way out.
Consequently, when we look at these developments in the Turkish economy, it would not be wrong to predict that, alongside the growing decline in domestic demand, the contraction in external demand will have an even more severe impact on the Turkish economy. Indeed, whilst exports rose by just 0.2 per cent in the first quarter of 2025 and increased by 2.0 per cent in the second quarter, they contracted by 0.8 per cent in the third quarter and by 2.3 per cent in the fourth quarter. As can be seen from this, exports—considered one of the key pillars of the Turkish economy—began to falter last year; worse still, according to TurkStat data, exports contracted by a full 12.7 per cent in the first quarter of this year.
When Turkey experiences such a contraction in exports, one inevitably turns to the EU; for, first and foremost, Turkey is the EU’s fifth-largest trading partner. The volume of trade between the two sides had reached a record high of $233 billion by 2025, with an annual increase of nearly 7 per cent. In other words, the EU is Turkey’s largest trading partner, accounting for approximately 42 per cent of its total exports.
Consequently, when such a contraction occurs, it inevitably requires us to examine the background to these developments; and upon doing so, the “Customs Union Agreement” signed between Turkey and the EU in 1996 immediately comes to the fore, as the Customs Union forms the basis for the EU being Turkey’s largest trading partner. However, as seen particularly in the second half of last year and the first quarter of this year, the EU—Turkey’s largest “export market”—is seeing a gradual decline in its purchases.
The economic impacts that have begun to emerge and may become increasingly prominent if the Customs Union is not updated can be summarised under the following main headings:
The Customs Union and Trade Volume: Although the current agreement, in force since 1996, ensures the free movement of industrial goods, it does not cover services, agriculture and public procurement. Modernisation talks with the EU and economic integration offer opportunities such as the relocation of supply chains to Turkey.
Need for Updates: Asymmetries arising from the Free Trade Agreements (FTAs) the EU has signed with third countries could be addressed, and modern trade rules—such as those governing e-commerce and public procurement—could be incorporated into the agreement to Turkey’s advantage. Failure to implement such updates could result in Turkish industry falling behind in the new era of global competition.
Visa Barriers and Sectoral Implications: Visa restrictions faced by businesspeople, transport operators and academics travelling from Turkey to EU countries negatively impact the logistics and services sectors, thereby increasing commercial costs.
The EU side is also aware of the difficulties Turkey faces due to the Customs Union. Nevertheless, calls for the updating of the Customs Union—which has been in force for 30 years and is now struggling to meet current challenges—are falling on deaf ears. The closest Turkey came to a concrete step in the update process was in 2016. However, in the 10 years since then, no tangible progress has been made on this issue. Turkey maintains that it is essential to expand the scope of the Customs Union and bring it into line with current conditions. Conversely, these calls have not been met with a response from the EU side for some time.
One consequence of this is that it makes it even more difficult for Turkey’s demands in this area to be met; because, earlier this year, the EU concluded two major free trade agreements (FTAs) in quick succession following years of negotiations: the FTAs with Mercosur, comprising South American countries, and with India. According to experts, these agreements also have the potential to create very serious challenges for Turkey, which is among the EU’s key trading partners.
At the seminar titled, “The Private Sector’s Perspective on the Update of the Customs Union”, organised on 15 May 2026 in collaboration between the Economic Development Foundation (İKV) and Marmara University, İKV President Dr Ayhan Zeytinoğlu, commenting on the free trade agreement the EU has concluded with India, stated, “The issue of updating the Customs Union is now of the utmost urgency,” and added:
“Turkey must be included in EU FTAs simultaneously, and services, agriculture and public procurement must be brought within the scope.
Without this, Turkey will continue to suffer structural losses with every new EU FTA. The expansion of the EU’s global trade network without an update to the Customs Union creates a systematic disadvantage for Turkey.”
The most significant issue for Turkey is that the Customs Union was designed according to the trade and economic realities of the 1990s. The current framework does not fully reflect new dynamics. The services sector, agriculture, public procurement, digital trade, the green transition, international investment and regulatory cooperation are absent from the current framework. The FTAs the EU signs with third countries also create problems for Turkey, as it cannot be a party to these agreements.
Whilst goods from countries with which the EU has signed FTAs enter the Turkish market under favourable conditions due to the Customs Union, goods exported from Turkey do not enjoy the same privileges in the markets of those countries. Non-tariff barriers are also causing problems. Chief among these are the restrictions imposed on lorries transporting goods from Turkey to EU countries and the difficulties regarding visas applied to Turkish economic actors.
Dr Zeytinoğlu, who stated that the EU’s new FTAs could change the future, noted that the FTA signed with Mercosur could have a negative impact on agriculture. Furthermore, addressing the areas of contention between Turkey and the EU, Dr Zeytinoğlu emphasised that Turkey’s exclusion from the negotiating table when the EU concludes FTAs with third parties creates a sense of injustice. Furthermore, likening the visa issue to non-tariff barriers, Dr Zeytinoğlu highlighted the importance of Turkey implementing the remaining six of the 72 criteria it needs to fulfil. He also stated that transport is a key element in Turkey-EU relations, noting that trade would be more efficient if carried out via sea and rail rather than road.
In its contacts with the EU, Turkey emphasises that the modernisation of the Customs Union will contribute to the competitive strength and economic security of both parties. During these contacts, the point that the update is essential for building a resilient and inclusive economic partnership is constantly reiterated. Turkey, which wishes to commence update negotiations without further delay, believes this will help create a dynamic agenda in relations with the EU. Messages conveyed to the EU at various levels also highlight the concern that a technically-oriented issue, which would benefit both sides, is being politicised.
The greatest support for the update of the Customs Union has come from the European Commission, the EU’s executive body, from the very beginning. According to statements made by Turkey, the Commission is doing its utmost regarding the update. The majority of EU member states also support taking steps in this direction. The European Parliament (EP), one of the institutions required to approve the update of the Customs Union, adopts a stance that, in principle, considers the update to be a positive development. However, its support is conditional. This stance is also reflected in the EP’s latest report. The document states that “for the EP to grant its approval at the end of the process, such modernisation must be based on strong conditions relating to human rights and fundamental freedoms, respect for international law and good neighbourly relations”.
Initially, the EU was reluctant to proceed with the update, citing the regression in the areas of democracy, the rule of law and fundamental rights in Turkey. In subsequent years, tensions in the Eastern Mediterranean were added to this. At this stage, the EU side, whilst not voicing it too loudly officially, points to three main issues.
The first of these is trade barriers “comprising certain restrictions and measures in practice”. Through both high-level trade dialogue and other technical contacts, Turkey has removed 15 of the 29 barriers. The European Commission remains of the view that further steps are still required in this area.
The second issue cited is Turkey’s relationship with Russia and the sanctions the EU has imposed on that country. For a long time, the EU wanted to ensure that Turkey was not circumventing the sanctions imposed on Russia. Recently, however, this issue has receded from the forefront, partly due to certain measures taken by Turkey.
The third issue is the same one that has faced Turkey at every stage of its relations with the EU: the Cyprus issue. The Cyprus issue was not a precondition for the Customs Union update. However, for some time now, there have been moves to create the impression that this issue is a precondition.
Following the EU Council’s decision to grant the European Commission the mandate to negotiate the update of the Customs Union, it seems inevitable that the process will take some time. Both Turkish and EU officials emphasise that the process will not be concluded overnight.
According to the EU side, particularly due to ‘implementation issues’ regarding laws and legally based regulations, it is difficult to speak of a very clear timeline regarding how long the negotiations will take. For this reason, it is unlikely that this issue will be resolved very quickly. Taking all possibilities into account, broadly speaking, a timeframe of approximately three years can be envisaged. Furthermore, a two-stage approval process will follow the negotiations. Approval is required not only from the members of the EU Council but also from the European Parliament; this is because, for the EU side, the “implementation” of potential decisions constitutes the “most important” aspect of the entire process.
However, the failure to fully implement or the relaxation of certain legal and structural rules in Turkey is directly affecting the economy. The main regulations undermining the investment climate and financial stability are as follows:
Competition Law and Authority Decisions: The failure to apply laws aimed at preventing cartelisation and monopolisation in the market in a sufficiently deterrent manner from time to time leads to unfair competition, distorted pricing behaviour and rising inflation.
Central Bank Independence Regulations: The prioritisation of price stability, as defined by law, being sidelined and the inability to implement monetary policy tools independently triggers a process of depreciation of the Turkish lira and high inflation.
Planning and Disaster Law: Practices that contravene planning regulations and building control regulations, along with past planning amnesties, result in the inefficient use of resources and significant economic costs in the event of disasters such as earthquakes.
Public Procurement Law: The expansion of exemption clauses in this law, which was enacted to ensure transparency and competition in public investments, paves the way for increased project costs and widening budget deficits.
Tax Procedure Law and Fair Tax Regulation: The failure to fully implement legislation designed to combat the informal economy results in the tax burden remaining on registered workers and businesses, leading to income inequality and losses in public revenue.
Judicial Independence and Property Rights: The erosion of constitutional safeguards regarding the rule of law and the protection of property rights negatively affects foreign direct investment (FDI) and long-term capital inflows, thereby increasing the country’s need for external financing.
Turkey’s Public Procurement Law has been discussed on numerous occasions in the “progress reports” analysing the European Union (EU) harmonisation laws, regulations and related practices that began following the country’s acceptance as a candidate for full membership during the Bülent Ecevit government, after a long wait. As is well known, Turkey officially commenced full membership negotiations with the EU on 3 October 2005.
In the EU’s “2004 Regular Report on Turkey’s Progress Towards Accession”, dated 6 October 2004, it was stated:
“No agreement has been reached on the action plan regarding the extension and deepening of the Customs Union. Discussions aimed at reaching an agreement on services and public procurement continued, albeit slowly, in 2003 and 2004. Turkey’s failure to harmonise public procurement constitutes a significant obstacle to these discussions. The Association Council Decision on the application of competition rules could not be signed because the Turkish State Aid Monitoring Board had not been established.”
Subsequently, the relevant section of the “Turkey 2005 Progress Report” dated 9 November 2005, which covers “the general principles of transparency, equal treatment, free competition and non-discrimination in public procurement legislation”, stated the following:
“Since the last Progress Report, no new progress has been made in aligning Turkish legislation with the acquis on public procurement. On the contrary, certain legal measures have even reduced the level of alignment. No significant progress has been made. On the contrary, the Public Procurement Law contains a number of exceptions, and amendments to the procurement law have caused Turkish procurement legislation to drift further away from the acquis. Turkey should refrain from adopting new exceptions that conflict with the acquis. Action must be taken to put an end to non-transparent and discriminatory public procurement practices and to bring the Public Procurement Law into line with the acquis.”
Journalist Metin Münir, whom we lost three years ago, also wrote the following in an article from 2008:
“Fourteen of the amendments were made directly to the Public Procurement Law.
Three were incorporated into the Public Procurement Contracts Act. The others are exceptions introduced into the Public Procurement Act via other laws. For example, the Petroleum Market Act removed the obligation for projects related to oil and natural gas to comply with the Public Procurement Act. This paved the way for pipeline, refinery, and similar projects to be awarded to companies close to the government without a tender process.”
In short, developments regarding public procurement regulations are included in the reports on Turkey published annually by the EU; just as in the latest report dated 12 October 2022:
“There is still no comprehensive public financial management reform programme in Turkey. The annual budget is prepared as part of the medium-term budget. Public procurement legislation is not in line with the EU acquis. The numerous exemptions added to the Public Procurement Law undermine transparency and accountability in public spending (see Chapter 5). As there is insufficient post-expenditure monitoring, major public investment programmes lack transparency.”
During the periods when Turkey’s enthusiasm for EU accession was at its peak, frequent reciprocal visits took place; efforts to address shortcomings continued uninterrupted. A significant component of these visits was the visits by European Commission members responsible for enlargement. These EU officials would typically first travel to Ankara to meet with relevant public authorities, and then proceed to Istanbul to meet with representatives of private sector organisations. During these meetings, one of the issues most frequently raised by the visitors was their complaints that the EU harmonisation laws and related regulations, which had been incorporated into Turkish legislation with great effort, were in reality hardly ever implemented.
Changes to the Public Procurement Law were also occasionally criticised not only by the EU but also by leading employer organisations in the business world. For example, the Istanbul Chamber of Industry (ISO), the Turkish Industrialists’ and Businessmen’s Association (TÜSİAD) and the Association of International Investors (YASED) issued a joint statement on 30 July 2003, objecting to the “Draft Law on Amendments to Certain Laws”, which proposed changes to the “Public Procurement Law and Public Procurement Contracts Law” submitted to the Presidency of the Turkish Grand National Assembly on 15 July 2003, during the first year of the AKP government.
In the joint statement by İSO, TÜSİAD and YASED, it was stated as follows:
“The Bill proposes to amend the provision of the Law regulating eligibility to participate in tenders. Accordingly, whilst the Law currently requires bidders to have carried out, supervised or managed similar works amounting to 70 per cent of the contract value, the Bill introduces a requirement for either 70 per cent execution or 50 per cent supervision or management. The Public Procurement Law has been meticulous regarding the professional qualifications required of bidders, previously evaluating ‘having actually carried out the work’ as a key factor in this regard.
Under the proposed amendment, those who actually carry out the work are assessed in the same way as those who supervise it. This approach stems from the negative consequences in our country caused by the ‘contractor’s licence’ scheme during the period of Law No. 2886, which led to individuals with no actual experience being allowed to undertake work. The provisions of the Law regarding the experience documents required of bidders are appropriate and should not be altered.”
Olli Rehn, the European Commission’s Commissioner for Enlargement, was also one of the most recognisable figures in the Turkish public sphere at the time. Every visit he made to Turkey was among the top news stories. During one of these visits (in 2005), when we asked him, “Mr Rehn, despite all these regulations being introduced regarding EU legislation, the fact that Turkey is still not being brought any closer to full membership is causing a public backlash. What do you say?”, his one-word reply, spoken syllable by syllable, was:
“Im-ple-men-ta-tion…”
Olli Rehn, in short, meant to say:
“For us, what matters in Turkey’s accession to the EU as a full member is not the EU’s presence on paper, in files or in legislation, but its integration into everyday life…”
Even whilst waiting at the door, one of the areas where we have benefited most from the EU is, of course, the Customs Union, which we joined in 1996. Dr Can Baydarol, a Founding Member of the European Union and Global Studies Association (EUGSA), explains some of these benefits as follows:
“Turkey’s automotive exports stood at approximately 2.0 billion dollars up until 1995. Of this, 1.8 billion dollars came from the ancillary industry, whilst only 200 million dollars were from the main industry’s exports. Today, we have reached an automotive export figure exceeding 30 billion dollars. Why? Everyone adapted their strategy and approach to the new conditions; and Turkey has now become a major export hub. In other words, we cannot deny the role of the Customs Union in this.”
At least at this stage, it is fair to say that the government has long since pushed the EU to the back of the agenda. In other words, just as has been the case for a long time, the government currently faces numerous ‘implementation’ challenges that need resolving: the cost of living, unemployment, education, justice, healthcare…
In other words, Turkey needs to resolve its problems, particularly those of an economic nature; yet, without neglecting education and justice. We can roughly see the cost of deviating from the decision made years ago to aim for EU membership. Therefore, it is clear that we must acknowledge that the gateway to prosperity, just as it was before, still lies through the EU, and that we need to swiftly begin implementing these measures.
As can be seen from all this, the growing concern regarding the erosion of judicial independence in Turkey—a development closely monitored with great anxiety at both the EU and international levels—is increasingly fuelling fears that this will also lead to the gradual erosion of the Customs Union, one of the most important support mechanisms for the Turkish economy. Consequently, social problems arising from poverty—which is opening the door to increasingly severe and pressing issues due to the rapid rise in the poverty line, which now exceeds even the minimum wage, and the poverty line, which surpasses four times the minimum wage—are also escalating.
In this situation, it is clear that Turkey—starting with those in power—must first take steps to overcome the political and economic turmoil of recent times, reduce interest rates below the official inflation rate, boost production, and, to the greatest extent possible, reduce and ultimately eradicate the poverty affecting a population of 780,000 square kilometres by strictly enforcing the law without exception.