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The Atlantic Council of the United States

Turkey’s Perspectives on the G-20 and Global Finance

Welcome and Moderator:
Frederick Kempe,
President and CEO,
The Atlantic Council

Lieutenant General Brent Scowcroft,
Atlantic Council’s International Advisory Board

Turkish Deputy Prime Minister Ali Babacan

The Atlantic Council of the United States,
Washington, D.C.

Date: Friday, April 20, 2012 

Transcript by
Federal News Service
Washington, D.C.

FRED KEMPE: (In progress) – who are here in attendance. It’s terrific to see such a great audience, particularly on a Friday evening. Mr. Deputy Prime Minister, I think this is very much a credit to you and of course the growing influence and dynamism of your country.

I’d also like to warmly – oh, I particularly want to greet the Turkish ambassador, with whom we’ve enjoyed a wonderful relationship; and also Kemal Dervis – where are you sitting, sir? – who did so much to set the Turkish economy on the right path in a previous – in a previous government. So it’s great to have you here as well, sir.

I’d warmly like to thank Frank Kelly of Deutsche Bank and Deutsche Bank for their ongoing sponsorship of the Mapping the Economic and Financial Future Speakers’ Forum. We’ve hosted so many economic and financial leaders throughout the series, so I’ll just name a couple: Christine Lagarde, Bob Zoellick, and most recently this week, U.S. Chamber of Commerce president Tom Donohue. So Deputy Prime Minister Babacan, you’re in good company.

I also wanted to add that tonight’s event is a great example of the collaborative strength of the Atlantic Council’s regional programs and thematic programs. We have nine programs and centers at the Atlantic Council. This one is co-hosted by the Global Business and Economics program, directed by Alexei Monsarrat, and the Dinu Patriciu Eurasia Center, run by Ambassador Ross Wilson, former ambassador to Turkey and to Azerbaijan.

We do a lot of this sort of thing. We have now our Rafik Hariri Center for the Middle East, and it partners very closely with the Scowcroft Center, the Center for International Security at the Atlantic Council. We have an Energy and Environment program; it can work together with our Africa Center. And so this is the way that we get a lot more done at the Atlantic Council, by working both globally and with our trans-Atlantic base on a mixture of issues.

I also wanted to say how proud we are to host the Turkish Deputy Prime Minister, Ali Babacan, tonight, who is both one of the world’s more successful economic policymakers and also a very good friend of the Atlantic Council. Mr. Deputy Prime Minister, we’re grateful to you for accepting our invitation today.

But we’re also very grateful for the time and support you have given to our Black Sea Energy and Economic Forum, both in 2010, 2011. This has now found its permanent home in Istanbul. The Atlantic Council’s first international office is in Istanbul, underscoring the importance of your country. We look forward to hosting you again at this year’s event, renamed “The Atlantic Council Energy and Economic Summit” – since Turkey didn’t want to be limited by the Black Sea, we decided we wouldn’t be either – that will take place November 15th, 16th in Istanbul.

Turkey is one of the world’s outstanding success stories. The poor, inflation-ridden and often ill-managed Turkey of the past has been transformed. Economic and political openings dating back to the mid-1980s, plus the country’s response to a terrible financial crisis in 2001, are part of the explanation. But among other key factors, none has been as important as the strongly pro-market, pro-financial management and pro-globalization hand Turkey’s current leadership has had, and in particular that of Ali Babacan.

The country is not without its problems. And I’m sure the deputy prime minister will address these. Current account deficit which rose to 10 percent of GDP before falling back in the recent months is unsustainable and it represents an obvious vulnerability. But the story underlying that is nevertheless dramatic.

To formally introduce Minister Babacan, it’s my pleasure to introduce my mentor and in many ways my inspiration, the chairman of the council’s International Advisory Board, General Brent Scowcroft. Though General Brent Scowcroft is a man who needs no introduction, I’ll nevertheless give a very brief one. But before I do that, I do want to ask that when we finish the question-and-answer session that if you remain seated to allow our guest to depart, and I really appreciate it if you would do that.

Brent Scowcroft has been a valued counselor to every president since Richard Nixon, including serving as national security adviser to Presidents Gerald Ford and the first President Bush. As I said, he’s chairman of the International Advisory Board of the Atlantic Council, former chairman of the Atlantic Council and a long-time board member. From these positions he has faithfully and ably led the Atlantic Council for many years, including now importantly lending us his name.

This fall the council will open – will formally open the Brent Scowcroft Center on International Security, which is really already operating as the international security program of the Atlantic Council. And it will carry on what we consider the Scowcroft appeal, an approach to foreign policy that includes reaching across political aisles and lines, which we think will again become fashionable, to build effective solutions, strengthening existing partnerships and forging new ones, all thoughtfully equipping the next generation to tackle the problems of tomorrow.

So I’m honored to be able to call General Scowcroft my inspiration and friend. It is my great pleasure to introduce him here tonight. General Scowcroft. (Applause.)

LIEUTENANT GENERAL BRENT SCOWCROFT (RET.): Thank you. Thank you, Fred, for that over-the-top introduction. I didn’t deserve it, but I enjoyed it. (Scattered laughter.) This is a very special afternoon for me, a particular pleasure. I first met the deputy prime minister when he took office in 2002, in the first AKP government. And he was 35 years old, young, taking over at a very difficult time. This was not just a simple change of government; this was a fundamental change in Turkey. And he has done a fantastic job.

He – when I met him he was minister of state for the treasury, as I say, in the very early years of AK Party governance. Ali Babacan was a point person for taking the initial pieces of the banking and financial recovery forum that was developed by Kemal Dervis in the previous government to lay the groundwork for a very difficult crisis in 2001, but preceded by difficult years of inflation. The Turkish economy was not a model of stability and progress.

But he took that – took the plans laid in by Kemal Dervis and both implemented them and building from them the pieces that would bring about the real prosperity that Turkey now enjoys. The results, as I say, are manifest and dramatic now. He also played a key role in the opening of accession negotiations to join the EU in late 2005. And that also contributed to the economic reform program, and in overseeing the initial preparatory work in diplomacy as well.

Ali Babacan fulfilled these roles so successfully that following the AKP’s re-election in 2007, Prime Minister Erdogan made him foreign minister. As foreign minister he helped take Turkish diplomacy in some new and promising directions, of which for the United States particularly pleasing was the effort at rapprochement with Armenia and their typical – or their long-standing problems in the region.

In 2009 a mid-term cabinet reshuffle brought Ali Babacan back to the economic side of the house and into his present – current position as deputy prime minister responsible for oversight of the economy. If his first stint was dominated by the internal legacy of the 2001 economic crisis and getting EU accession started, his second term has been marked by the economic problems and issues created for Turkey and the world by the financial and economic problems that first appeared in the United States in 2008 and became a contagion in Europe that endures today. His success in those efforts, I think, are manifest.

Minister Babacan brings a strong Turkish model to the table, and also now an unusually experienced set of hands to the G-20, where he is now a prominent member. Fred mentioned Minister Babacan’s friendship toward the council and our annual Energy and Economic Forum as – in Istanbul. As a Fulbright scholar at Northwestern University’s Kellogg School of Management, he also became a good friend of the United States, as well as of the Atlantic Council – a twofer.

We are very fortunate to have this wise leader playing such an important role for Turkey and in the high circles of global financial government. Please join me in welcoming Deputy Prime Minister Ali Babacan. (Applause.)

DEPUTY PRIME MINISTER ALI BABACAN: General Scowcroft, President Kempe, Ambassador Wilson, ambassadors, ladies and gentlemen, distinguished guests, it’s a great pleasure for me to be here today with you all. And also it’s a great pleasure to see so many old and good friends in the room.

At the outset of my speech I would like to extend my sincere thanks to the Atlantic Council for organizing this event here in Washington, D.C., but also for the council’s contribution to the Turkish-American relations. And I would like to comment on the Atlantic Council’s work for energy and economy initially for the Black Sea region, but now it’s become a regular, periodical event in Istanbul, turned into a summit and also almost a global organization nowadays.

And allow me also to start my remarks – to touch a little bit about bilateral relations between Turkey and the United States. Turkey and the United States are two countries which are friends, partners and allies. We have stood together in many international challenges, strongly together. What’s more, major international issues that our countries have to deal with at present are very much overlapping. These issues include Iraq, Afghanistan, Pakistan, Middle East peace process, North Africa and Balkans, Caucasus, Central Asia, energy supply security, fight against terrorism, prevention of nuclear proliferation and also tackling the global financial crisis.

When I first started my position as minister of foreign affairs, I asked my counterpart back then, Secretary Rice, why don’t you just list the top 10 foreign policy issues of the U.S., and I will list mine, and let’s compare those lists. Almost every single of those 10 items are identical. Although we seem to be far away on the map geographically, the kinds of subjects that Turkey and the United States are dealing with, internationally and regionally, are so overlapping.

Ours is a time-tested and real partnership. It has witnessed several political and critical phases, I would say, in recent history. And today our partnership immensely is relevant not only for our countries but for a very wide region. Recent developments in the Middle East and North Africa once again highlighted the significance of Turkish-U.S. cooperation. Turkey and the U.S. have been consulting very frequently and exchange views on the events in our region and beyond. Continuation of this close cooperation and coordination is very much essential.

Ladies and gentlemen, Turkey and U.S. share and promote the very same values around the world: democracy, fundamental human rights, freedoms, rule of law. And we share the very same targets: peace, stability, security and prosperity for all.

When Secretary Clinton came to Turkey as one of her very first overseas trip, and when we had the joint press conference, she described Turkey and the U.S. as two countries which have a sense of global responsibility. And when we had our very first meeting with President Obama, after he came to his job – to his new position, he called our partnership a model partnership – a partnership which can be a good example for other countries as well.

We started a framework for strategic and economic commercial cooperation. We first had meetings here in D.C. in 2010. The second set of meeting will take place in June this year. We have formed a business council between Turkey and the U.S. It’s the first time in our history that the economy and commercial subjects are being taken at very high level – at Cabinet level by two Cabinet members from two sides.

In 2011, our exports increased by 22 percent – our exports to the U.S. – and our imports from U.S. increased by 30 percent. So the momentum is already growing when we look at the trade figures. And last year we received 675,000 U.S. citizens as tourists to Turkey. So this is also very important – human-to-human touch is also an important aspect of our relations.

Ladies and gentlemen, distinguished guests, Middle East and North Africa – the region which Turkey is centered in – is going through a historical transition process. And this process is long overdue. It is a homegrown process. And this is quite an irreversible process as well. The process is quite unique for every country and will probably go through several phases and stages.

The will and the aspirations of the people is being better and better reflected to the way how these countries are governed. Turkey is doing a lot of work in many of these countries. And most of our work is simply sharing our experiences – our experiences of our own democratic transformation that we have gone through, and we are still going through to a certain extent, and also our experiences of the economic transformation that we lived through.

We believe that a functioning example is probably much better than prescriptions written somewhere else outside those countries. I’m just actually coming from a G-8 meeting called Global Partnership – a meeting – (inaudible) – all the G-8 countries with some – several more countries and help the countries in different phases of their transition. Better private sector involvement and strong economic programs, multiyear programs to bring predictability is going to be very important for most of those countries.

When we talk about Middle East and North Africa, I would like to touch a few points about Syria. Right now what’s going on in Syria is a serious human rights crisis. Escalations of violence has caused the deaths of thousands of people. It’s a humanitarian tragedy that’s going on. We hosted the second conference of Group of Friends of the Syrian People in Istanbul at the beginning of this month, on 1st of April.

Eighty-one countries, as well as many international organizations, joined the conference. We made an urgent, comprehensive and immediate implementation of all the elements of Kofi Annan’s plan – the former secretary-general’s plan, who is now the representative of not only the U.N. but the Arab League as well. Syrian National Council, the one and only serious and credible opposition formation of the Syrian people, has been given legitimacy in the Istanbul meetings. Recognition as the representation of the people of Syria was very important for the Syrian National Council.

We need to see visible, verifiable and indisputable signs of change on the ground. Primary responsibility to end the violence rests with the Syrian regime. We welcome the resolution which was adopted on April the 14th by the United Nations Security Council. The message was, at least finally, the international community stood up with one single voice. It’s a step in the right direction.

The resolution envisages a U.N. supervision mission. And we are pleased that the advanced team is already on ground. We believe that a sufficient number of observers should be deployed as soon as possible. And the key indicator at this stage is whether peaceful demonstrations can be held free from violent repression. So this is going to be an important test on ground.

We are expecting the Syrian regime to fully and visibly fulfill its commitments in their entirety, in accordance with the set Security Council resolution. Turkey has already adopted an open-door policy for the citizens of Syria who have been actually fleeing from the operation and the violence. We have set up eight camps in which right now approximately 25,000 Syrian citizens are living temporarily.

Egypt, orderly and timely conclusion of the democratic transition is essential for this country. It will have important repercussions for the entire region. Egypt is the most populated and probably the most important country in the Arab world. And what happens in Egypt is going to set a very important example for many countries to follow.

Conclusion of the elections for the People’s Assembly and the Shura Council as well as opening of the new parliament represents a significant phase in Egypt’s democratic transformation. Yet as the transition process gathers momentum towards the presidential elections the tension has started to rise. Delays in democratic transformation would bring back people’s frustration and resentment.

The Egyptian people have been, for a very long time, aspiring for a full democratic system. Economic reforms and austerity measures are also very urgent for Egypt as well as for many other countries in the region. If the political transformation is not accompanied by the economic transformation, then it may be a big setback for the citizens of many countries.

Yemeni government and the opposition in Riyadh on November 23rd last year embarked the political transformation process. And all parties in Yemen, if they just fully implement the terms of this agreement, it will be very crucial for that country. We welcome the presidential elections and we think it’s an important step forward.

Now the Yemenis should convene an inclusive national dialogue conference with the spirit of reconciliation and solidarity, reform their constitution, reorganize the military and security forces and hold the presidential and parliamentary elections by 2014 latest. We attach importance to the Friends of Yemen process, and we will actively participate at the next meeting, which will take place in May in Riyadh.

Bahrain International (sic\Independent) Commission of Inquiry on the recent events was a good example upholding the principles of the rule of law and accountability. We welcome the reforms that has been in the area of security, judiciary, media and education. The opposition should be encouraged to act with a spirit of reconciliation, common sense and reason. The risk of sectarian confrontation is still valid and all sides need to act with common sense.

Tunisia and Libya, two countries which we should also try to help during this post-revolutionary period. Tackling the economic situation is a major challenge in Tunisia. There is an urgent need to restructure the Tunisian economy, and we are working on joint projects and we are sending teams, receiving teams for technical support.

Libya is definitely a much more difficult case. The restructuring of the Libyan National Army and police, reintegration of the militias into the society and preparations for National Congress elections are the main challenges ahead. Also, uncontrolled weapons in the hands of Libyan civilians and other possible smuggling to neighboring countries pose a real danger to the stability, not only for Libya but also for the countries across the region.

We hope the elections for the National Congress could be held as scheduled in June this year. We are engaged with the interim government and actively assisting them in various fields. So far, we have offered technical training programs to more than 3,000 Libyans in various fields during the course of this year, and we will help to convert 1,500 militias into law enforcement officers. We are also planning to contribute United Nations Special Mission in Libya in the field of effective implementation of social services.

On the Middle East peace process, Turkey has always promoted a two-state solution that would create a state of Palestine living in peace and security with the state of Israel. We support the efforts for the resumption of the negotiations between the parties, yet the Israeli government’s continued intransigence on the settlements remains a major obstacle for the peace process. Indeed, the recent efforts of the resumption of the peace process did not yield any results either.

Talks should not be expected to make progress unless it starts with a serious commitment from the Israeli government to respect the existing parameters, particularly on the 1967 borders. President Abbas, during his visit to Turkey in February, confirmed that the Israeli position during the exploratory talks in Amman was mainly focused on altering the established parameters, which we think is a step in very wrong direction.

Ladies and gentlemen, distinguished guests, Turkey is now a provider of economic and logistic support through our different agencies. And our official development aid last year exceeded $1.3 billion. I’m thinking that Turkey was an aid-receiving country until the year 2004 and now we are an emerging donor country is also a sign of how things have actually changed. And actually last year across the OECD countries, we were the country which increased its ODA with the highest percentage – 38 percent increase over the year of 2010.

We have now development programs in more than 100 countries across the world. In Africa alone, we increased the number of our embassies from 12 to 27. But back in 2008 we targeted for 34, and those 34 embassies will be completed by the end of next year. Turkish Airlines already fly to 19 African states nonstop. Turkish Airlines now is, by the way, third largest airline in Europe, with more than 190 destinations worldwide.

This could be probably a good transition to now what I will be telling you about the Turkish economy, an economy which really went through a very serious transformation process. Before the 2008-2009 crisis, we have made many important reforms in Turkey. In 2004, (200)5 and (200)6, we made major reforms in our banking sector – a brand-new banking law, a brand-new saving-deposits insurance fund law, a brand-new mortgage law, credit card law.

These laws all introduced very forward-looking aspects for our banking sector. We have strengthened supervision, we have strengthened regulation and we have implanted – we have implemented the rules with no exception. We have gone through important reforms in our Social Security system, that was 2006. We have went through a very important health care reform, universal health care coverage which has low cost but very high satisfaction level. Our public financial management went through a very important reform in 2004.

So in a way our fiscal adjustment efforts was very, very important. So before this 2008, 2009 crisis, we were able to bring down our budget deficit, we were able to bring down our public debt. So the two major source of crisis, banking and public finance, were actually our social strengths before the crisis of 2008, 2009. That was one of the things which actually differentiated us from rest of Europe. What we have done during the crisis was also very different.

In 2009 when many countries were announcing fiscal stimulus programs to stimulate growth in their economy, we followed the other way around. Although in 2009 our economy was shrinking at 4.8 percent because of the reduced exports to the European Union, we announced a fiscal consolidation program that sounded very counterintuitive for many. They said: What are you doing? During the time of a shrinking economy, you should just spend more.

But our position was very clear. We said that if our economy is going to grow, this is going to be by the activity of the private sector, not by the activity of the government. Government spending is only about 20 percent of the total spending in Turkey. Government investments are also only about 20 percent of the total investments in the country. So a country – for a country where public debt can always be questioned, fiscal stimulus programs probably won’t work. So that was our position.

And we announced a three-year program – not just a one-year program, but a three-year program – of fiscal consolidation to bring down our budget deficit even further down and also to bring down our public debt even further down. That worked out excellent for us. The confidence came back very fast. Our banks continued to lend. Our consumers started to spend. And our private sector started to invest.

And by high lending, high investments and high level of domestic consumption, we had a growth rate of 9.2 percent in year 2010. This was followed by 8 ½ percent growth in year 2011. During last two years, we were able to create 3.7 million additional jobs. And also our income distribution improved dramatically. The Gini coefficient in Turkey has dropping systematically for the last decade or so. OECD announced a report at the end of 2011: Across the OECD members, Turkey is the country which was able to decrease its Gini coefficient with the highest magnitude.

This was a result of targeted social policies. This was a result of our new income tax regime, which we introduced back in 2007. And also this was a result of competition, working in Turkey better and better. So no longer privileges or special protection areas for certain companies or families; it’s a fierce competition going on inside the country. So no more making easy money.

And our companies which are competitive in the country, in Turkey, are becoming very strong competitors in Europe and elsewhere. So in a way, learning our companies to stand on their own feet and to survive and make money by only being more efficient and productive, those companies are now becoming regional and global companies

Our banks also stood very strong all throughout the crisis. We didn’t have to transfer any government funds to any Turkish bank. We didn’t even change our guarantee scheme, although across the EU the guarantees for deposits were increased 200,000 euros at least. In some countries, it was a blanket guarantee. We didn’t even touch our guarantee scheme.

And as it was proven in our stress tests, which we have been doing periodically since 2004, every single Turkish bank and every single balance sheet stood very, very strong. So in a way our strengths before the crisis were different. Our policies during the crisis was different. And our results are also quite different from what has been going on in most of the European countries.

But this success also came with some side products. Inflation is now slightly higher than what we would like to see. And also current accounts deficit of Turkey is also quite high. And in order to have a growth, not just a high growth but a sustainable growth, we have decided to continue with our tight fiscal policies. Our budget deficit last year was only 1.3 percent of our GDP. This is one of the lowest across Europe. This is quite low by any measure. Our debt to GDP decreased to 39.4 percent of our GDP. And our public debt will go down to about 32 percent by year 2014.

We are going to continue to use the macro prevention measures with our banking system in a very careful way. Because of high current accounts deficit, we have started to tighten the banking policies since the end of 2010. And since the middle of 2011, our central bank started to tighten the monetary policy as well.

So the tight fiscal policies are now also accompanied with tight banking policies and also tight monetary policies as well. So this year’s growth, we expect it to be at around 4 percent. That is intended because we wanted, as I said, this growth to be a growth which will continue towards the next years, not just have high growth for few years and see a difficult situation after that.

Structural reforms is going to be at the core of our policies for many years to come. Labor market reforms, which we are now working on to bring more aspects of flexibility, to give more elements of competiveness for our companies, is going to be very important. Enhancing the investment environment, giving more reasons for the private sector to invest in Turkey, which is already happening but we want to see it to reach better figures.

Increasing the saving rates in the country is also a very important target for us. Because of the very high consumer confidence level in Turkey – mainly because of that, but there are also other reasons – the saving rates in Turkey dropped to 12 percent of our GDP. So people have their full trust for future. They tend to spend, but not to save. And that’s why now we are coming up with new measures to give more reasons for our citizens to save – not forcing them, but in a way giving incentives to them – incentives to save.

It is also going to be an important target for us to make Istanbul one of the leading financial centers globally. And we have an action plan, and we are in the phase of implementing that action plan and heading for the hundred-year anniversary of the republic. And that date we would like to see Istanbul as one of the 10 leading financial centers globally. Many steps being taken towards that direction.

And we have the luxury of having a good business environment with low taxes for a foreseeable future. In many countries in the developed world, taxes are going to be increasing very fast inevitably. There is now a talk about a financial intermediation tax which could be implemented across Europe or more countries. But in Turkey, since our budget and our public finances are in such a good shape, that we are going to have the luxury to keep our taxes low for a very long time.

Energy is also another important item. We are too dependent on energy and oil imports. And that’s actually one of the main reasons of the high current accounts deficit. If today we didn’t important any oil or gas, our current accounts deficit will be a very negligible number. So are moving into nuclear energy now. We are moving into more renewables. And energy efficiency programs are also in our agenda.

Let me just look around us and look at Europe and what is going on there, because eurozone nowadays seem to the be the most crucial region, let’s say, when we look at the global economic outlook. At the core of the issues, we have weak banks. At the core of the issues, we have very high public debt – public debt which is almost as high as the levels that we have seen during the second world war.

So far ECB has been working a lot. But only by more liquidity, only by printing more money, the problems in the European economy is not going to be solved. ECB’s work can be only regarded as a work which gives an opportunity window for the governments to do the real job, to do the fiscal adjustment, to do the absolutely necessary structural reforms – reforms that will bring more competitiveness, reforms to deal with the social security system which is heading to bankruptcy in quite a few number of countries.

And also in the European Union, we need a strong common fiscal framework. Euro started almost a decade ago, so there is one common currency. But every country used to have very different fiscal policies. And now it is time, we believe, for a strong fiscal union, not just a political union or a monetary union, but a fiscal union as well. The six pack, the fiscal compact – these are all good steps forward. But implementation is going to be the key. So 2012 is going to be an important test year for many of our European neighbors for the implementation of what they have already promised.

Strong political leadership and strong solidarity within the European Union is absolutely necessary nowadays. Solving the eurozone’s problem will be long time, will be complex, will be very challenging. 2012 is important for EU, for eurozone, but 2013 is going to be probably at least as important for the global economy for what we are going to be observing in the United States, especially after the elections this year. Markets, the business world and all of us, I would say, we are expecting to see some concrete steps forward next year.

For the U.S. also, Fed has been working very hard. But if it is only the Federal Reserve trying to resolve the problems, it is probably not going to work out eventually. There is now hope for better employment figures, better prospects for growth but this is not sustainable unless it is – it is accompanied by serious measures on the fiscal side. And now there’s probably credit given by the markets until the end of this year, but 2013 is going to be a very important test year for the U.S. economy and policies that will be implemented by the administration next year.

Ladies and gentlemen, distinguished guests, it just – as final words, Turkey has a dynamic society, a young society and a robust free market economy, a democratic political system and, well, a social tradition of reconciling modernity in with our cultural identity. Considering the great shift that is happening globally, considering the historical transitions that’s happening regionally, considering the relentless search for a new balance in economy, in geopolitics, the common denominator between Turkish and American interests and objectives just keep growing. We are ready for a deeper partnership in many, many fields. Thank you for your attention. (Applause.)

MR. KEMPE: Deputy Prime Minister Babacan, that was a – that was a – really, a fine speech. And I think the topics you hit just show the breadth of responsibilities you share. We have a few minutes for questions, perhaps about 15. Let me just quickly ask one or two of my own and then if we have time, we’ll go straight to the audience.

First of all, you’re one of the longest-serving economic managers, leaders, of the G-20 now, even at not such an old age. And I wonder if you could tell us, of those items you hit in your speech, what are going to be agenda items – you’ve had your meetings; you had some meetings already with the other leaders – what’s going to be the most important thing this weekend, agenda item one, agenda item two? And then on Europe – and maybe it’s one or two – are you more optimistic than you were last year? Less optimistic than you were last year? How are you looking at Europe and the eurozone crisis?

MR. BABACAN: We actually just completed the G-20 ministerial meeting at 2 p.m. today in the afternoon. And we have already published a communique. But what we have discussed mostly behind the closed doors was about the banking reforms, the need for deleveraging and how it should be managed – how it should be managed so that this deleveraging is not going to hurt growth in developed countries. We as Turkey – we always say that the banks should have just more capital. They should not shrink their balance yet but should have more capital for their – for their balance sheets and so forth.

And also another important subject was of course the resources of IMF, because IMF has now about $400 billion of resources. And they will need probably at least that much additional, and how to reach that figure. The Europeans have already increased the size of their firewall, but that size was probably at the lower end of the expectations. And now IMF is having more resources by commitments from quite a few members already. So anyway, these are going to be – the European firewall and the IMF we can also call the firewall, is going to important to be ready for some casualties within the next several months or even several years. So this was also another important topic for the G-20.

MR. KEMPE: And some disappointment about willingness of the U.S. to increase as much as some would like it to increase its IMF contribution.

MR. BABACAN: Well, I think from there is a fair understanding that this year is a sensitive year for the U.S. So I think we are going to have the patience until the next year and see what can be – what can be done. But the U.S. has been the major shareholder of IMF and the World Bank, and has always had a fair share of the burden and the cost whenever it was necessary globally or regionally. So I think the general expectation is that eventually U.S. is probably going to do their own share. But this probably is a matter of time; that’s what we expect at least.

MR. KEMPE: And the view on the eurozone crisis and where we are now in the –

MR. BABACAN: The eurozone crisis, I have already touched during my remarks, is now – it’s a wait-and-see phase that we are in, because decisions have been made. Political statements have been made. The leaders have already committed to many promises. Now 25 out of the 27 countries will make changes in their constitution to have a fiscal rule and to target very tight budget figures in order to have debt sustainability. But then these will have to go through parliaments. And we will see if all those 25 countries will be able to make these constitutional changes and commit in such a firm way for their fiscal adjustment processes.

So we will – I think it’s not easy to prejudge what will happen. And I believe that many investors, markets, players – they are also waiting and following what will – what will happen, because the developments in the markets (ph) indicators after the promises, after the declarations, were not really dramatic. So I think there is a chance of slippage, which the markets are already taking into account.

MR. KEMPE: Well, I think that’s it. The markets have always believed, or have believed for a long time, that the European Union has been a day late, a euro short. And I wonder if you believe that – reaction to Spain is showing some of the same – do you in your position, where Turkey is so much a player that’s affected by this – are you – are you satisfied with the pace of change of Europe? Or do you still feel that it’s a euro short, a day late?

MR. BABACAN: Well, I think what’s happening – and this is more of a personal assessment, I would say, but the – many European countries, when we look at the period after the second world war, has not really faced a serious crisis. So when this crisis hit, probably there was quite a lack of experience of how to deal with a crisis and what kind of steps to take and how fast to take those steps. And during times of crisis it is very important to do it big and to do it soon. And especially for the new elected governments, it is very, very important to do what is necessary in the first few months. So this has not happened in many countries.

So now we have technocrat governments in Greece, in Italy. They also have some opportunity window to move, but if they wait too long, then people will start to ask, well, I didn’t vote for you. And you are asking me to sacrifice. So that is going to be probably a difficult period, which we lived in Turkey to a certain extent in our recent history. So technocrat governments are OK, but for a short time to get things done. But eventually elected governments should come in and just explain people what is necessary, why it is necessary, and also ask for sacrifices.

It’s not – it’s not easy, because many European countries have been probably living a wealthier level above what they could afford. So they borrowed, spent and had an artificially high level of welfare. And this welfare level – it’ll have to drop in many countries. And it is going to be painful. It’s going to be costly. But this has – this needs a very open communication, and tell the very open truths to the citizens about what is needed to be done, because if this is not done by the hands of the governments, eventually it will be done by markets but in a very severe way. So the market adjustment is going to be very dramatic and probably dropping the welfare levels much faster and much stronger than it would be otherwise.

MR. KEMPE: Thank you for that answer. Quickly on the Middle East and North Africa: Your outstanding economic performance, growing political role, prompted Time magazine to rank you and Foreign Minister Davutoglu among the hundred most influential people in the world. You talked a lot about the Middle East and North Africa. How do you want to use that influence? And maybe drill it down with the specific example of Syria: what a difficult situation, a new time of influence for Turkey – how do you want to use influence there? What are you calling upon, or what would you like your American and European friends to do with you in Syria?

MR. BABACAN: Well, what – I think our influence is mostly coming very naturally from what we have done in Turkey, because what we have done in Turkey has become a source of inspiration for many countries. In a way we were ready to prove that Islam, democracy and secularism can coexist and function in quite a good way in a country where 99 percent of the population is Muslim.

So in a way, the old rhetoric about, this cannot function; or the old rhetoric about, if you want security you need more of an autocratic regime; or if you want stability, you know, democracy is not going to bring any stability, so I will bring to – stability for you. So that was the rhetoric of the leaders for many, many decades. So I think what has happened in Turkey has changed the mentality in many, many countries. And also what’s happening in Turkey is a – is a home-grown process. It is based on the will of the people. It is based on the trust of the people to an elected government. And this has been confusing the minds of many, many young people in the – in the region.

And what is happening in Syria is – (inaudible) – quite a tragedy, because – mostly because I would say the international community did not stand as a united front. In the case of, for example, Libya, the situation was different. In the case of other countries, we had case-by-case very different transition processes. But for Syria the regime was able to find supporters, supporters of probably not what they are doing, but supporters for the continuation of the regime, because in some – for some countries they had a keen interest to have the regime in Syria continuing, because the alternative would probably hurt their national interests.

So that was a big problem for a long time. So that’s why I think the 14th of April Security Council resolution was a good, important step forward. The – Bashar Assad and his companion – I think they have total lost their legitimacy, because when a regime kills its own citizens by masses – not by targeting individuals but bombing cities by navy ships or using tanks to bomb houses – and this is happening in their own country for their own citizens – then probably they will find it very, very difficult to survive. It’s going to be just a matter of timing that things will change in Syria.

What was happening was – until recently, was there was not a credible alternative to the current regime, because if we asked the regime to go, OK, what’s going to happen? But now a credible alternative is also being built up, a very representative and stronger and stronger national front being more in charge of what is going on in the country. And we expect that the domestic dynamics of Syria could make many, many changes if the violence stops.

MR. KEMPE: We have this –

MR. BABACAN: So that’s why these observers – U.N. observers are going to be very, very important, because if those observers are over there, and if the violence will stop, then natural domestic dynamics will do the rest of the job.

MR. KEMPE: What’s your advice – Syrian National Council – our Rafik Hariri Center next week will be hosting the chairman and other members of the council at the Atlantic Council. What’s your advice to them? What’s your most important piece of advice to them?

MR. BABACAN: Get united. Be very representative, so that you should have all the ethnicities, all the religions and religious sects in the country with you, and make sure that the international political legitimacy is there and finally legal legitimacy IS there for the – for the opposition. So it’s – maybe this is – OK, we are calling them opposition, but as I said, there is a need for A credible alternative TO the current regime. And that’s very important for the future of Syria.

MR. KEMPE: We have to be very cognizant of your schedule. You’ve been very kind to work us in. Let me just take – I’m really sorry, but let me just take one question, one question. That’s all. If you could ask them very briefly, and then the deputy prime minister can answer briefly. Thank you.

Q: John Roberts of Platts. Can I just ask Mr. Babacan, Turkey was instrumental in getting the intergovernmental agreement for the Nabucco project when that was live. Now you are promoting the – (inaudible) – project. Will it be regulated on the same principles as the IGA thought out for Nabucco? In other words, is it going to meet all the kinds of terms that the European – that made the European Union so happy with Nabucco.

MR. KEMPE: And, Mr. Deputy Prime Minister, we’ll take one more and then you can answer that very complicated question in one minute or less. (Laughter.) Yeah.

Q: Hi. Mustaf Assauge (sp) from the Representative Office of the Turkish Republic of Northern Cyprus here in Washington, D.C. The Cyprus problem have been one of the hardest to solve problems in the political agenda since more than 40 years. While it was like that, our Greek Cypriot neighbors in Cyprus, they were accepted as full members to the European Union. And they will be taking over the EU council presidency in summer. How would you evaluate this, how it will affect the relationship between – relations between Turkey and the European Union? And would it affect the economic relations in any way? Thank you.

MR. BABACAN: Well, the Cyprus problem has been there for many decades already. And there were several very serious attempts to solve the problem in a comprehensive way. The last attempt – the serious attempt, I would say, was in 2004 when Kofi Annan – when he was the secretary-general, he came up with a very comprehensive plan negotiated by all the relevant parties and accepted by the governments – governments meaning not only the Greek Cypriot but also Turkish Cypriot governments – as well as Turkey, Greece and U.K. has grantor countries.

But this plan then was offered to a referendum. In the north of the island, Turkish Cypriots voted yes by a majority of 65 percent and the Greek Cypriots voted no by a majority of 75 percent. The Greek Cypriot leaders unfortunately, right after their agreement around the table, they went back and started a negative campaign for the plan.

So that didn’t – that didn’t work out. But what happened is right after that event, Greek Cypriots were accepted as a member to the European Union and Turkish Cypriots were isolated by the European Union. And that is the case for the last eight years. And we believe that that is not fair. Turkish Cypriots were the ones trying for a solution, trying very hard to get out of this complex situation because they have incentives for the solution.

But the Greek Cypriots – we believe that they don’t have many incentives, especially after they became part of the European Union, they are using all the EU funds exclusively for the south of the island. They enjoy the privileges of being a member of the EU, as being the theoretically sole representative of the island and so forth.

And in any kind of solution, they will have to share what they have. They will have to share the government, because there will be partnership – state and partnership government at the end of the day. They will have to share their EU membership. They will have to share the resources, funds flowing from the EU. And what they will get at the end is probably not that much.

So the big mistake, not only in my view but in the views of many of our European colleagues, was to accept them as a member before resolving the problems. And it’s the first time that a new member has a huge dispute of borders. The island is literally divided into two. And you are taking this semi-member, let’s say, in the EU. And that problem is now a European Union problem – within the European Union.

We have not recognized the Greek Cypriots as an official state or as an official counterpart. So during the term presidency of the Greek Cypriots, we are not going to attend to the political-level meetings which they chair, but our relationship with the EU is going to continue at the technical level. We are going to represent it in all the technical circles or platforms. We are going to continue with our relations with the commission.

And so for just six months, you know, we are not going to be sitting around the table of politicians, let’s say. That’s about it. We are committed to the EU membership. We are committed to the process. It is very crucial for our domestic reform processes and also it’s a very important strategic target, important not only for Turkey but for the EU as well. So we have every reason to push the process forward for our own Turkey EU accession process.

For the – for the question on the energy pipelines, Nabucco was, of course, a very crucial project, and is still a crucial project, giving an alternative route for the energy needs of the European Union. And the problem – there are I think two important problems with Nabucco. One of them is just there are so many countries involved, and if even one single country in the chain has a kind of a problem, then the project doesn’t go forward.

And the second problem is that we still don’t have sufficient amount of gas to fill the pipeline. So if there’s going to be the pipeline, there has to be sufficient amount of gas. And this has somewhat to do with the relations between Turkmenistan and Azerbaijan, the disputes on the Caspian Sea. But that has also to do with what will happen in Iraq because it was also one of our ideas to have some Iraqi gas in the Nabucco pipeline.

And the situation in Iraq is also quite complicated nowadays. The rift between the Iraqi Kurds and – (inaudible) – government is growing, mainly because of the politics of – (inaudible) – policies of Prime Minister Maliki himself, I would unfortunately say, following a very sectorial line, not actually doing things for all the ethnicities, religions, religious sects of the country, but a very shy extent of policies, I would say, is hurting the national reconciliation efforts in Iraq. So the Iraqi domestic dynamics also is making it hard, at least for now, to supply gas for Nabucco.

So when Nabucco is getting late, then the south stream is moving on phase by phase, which Russians came up with. But for any project in our region – any energy project, I think it’s very important to have an inclusive approach towards Russians because they have an important role and also many different tools and ways and means of effecting different projects.

So actually when I visited Sergei Lavrov back in 2007 the first time, I even asked them why don’t you become a partner in Nabucco? They were quite surprised at the beginning, but as I said, seeing Russia as – not as a competitor, but as a partner in the major energy projects in our region is very, very important, I believe. Otherwise, many, many things are being tried but then being blocked one way or another.

MR. KEMPE: Mr. Deputy Prime Minister, as you can tell by the audience, we could go on another hour. The problem is you can’t. So I’m going to ask the audience to applaud you. I would ask you all to stay in your seats, let the Deputy Prime Minister depart, and please stay in your seats until he’s been able to leave the room. But thank you so much. That was a wonderful speech and a very engaging conversation.

MR. BABACAN: Thank you. (Applause.)


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