On Friday morning, the lira hit another record low, plunging to as far as 6 against the U.S. dollar. According to Viraj Patel, foreign exchange strategist at ING, there’s “limited scope for a EUR/USD rebound in the short-term.”
“That said, during the sharp lira sell-off this morning, the spillover into the euro was limited, implying that the euro contagion effects may be more acute and muted than initially feared. This may hold for the time being unless the implications for the European banking sector deteriorates materially,” he said in a note.
However, the economic turmoil in Turkey could have other consequences for the euro zone. The 19-member area runs a trade surplus with Turkey, having exported 63 billion euros ($76.2 billion) last year alone. Thus, if Ankara loses economic power to purchase foreign goods, there could be a direct impact, even if small, on euro zone growth.
Perhaps, more importantly, the European Union (EU) relies heavily on Turkey to contain the flow of migrants trying to reach Europe.
“A deep Turkish recession could lead to more migrants leaving Turkey for the EU. Currently more than three million Syrian refugees are living in Turkey,” Hesse warned.
The high inflow of migrants and refugees has been a contentious point for European leaders, with some publicly refusing to receive them. At the same time, the increased presence of migrants and refugees across Europe has led many citizens to vote for more extremist and radical parties, which could become a big headache for mainstream parties ahead of fresh European elections next year.
“Despite disputes between Turkey and the EU on many issues, the EU has a strong interest in a stable Turkey,” Hessen said.