Erdem Başçi: Turkish-Austrian economic relations in a European and international context Keynote speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at the meeting of “Turkish-Austrian economic relations in a European and international context”, hosted by the Central Bank of the Republic of Austria, Vienna, 18 March 2013. *  *  *  Distinguished Participants, I would like to start by thanking Ewald Nowotny, the Governor of Oesterreichische NationalBank for hosting the meeting on the “Turkish-Austrian Economic Relations in a European and International Context”. My colleagues from the Central Bank of the Republic of Turkey and myself are pleased and honored to take part in this important event. After this meeting, opening ceremony of the Exhibition titled “Contemporary Turkish Painting and Printmaking in the Republican Era”, which is composed of some examples from our Bank’s collection, will take place. It is my pleasure to invite you all to the opening ceremony which will take place this evening at 7:00pm. In my speech, first I will share a few observations about the increasing importance of emerging market economies (EMEs) in the global system. Then, I will talk about financial stability in EMEs in general and Turkey in particular. Finally, I will conclude with the developments regarding the economic relations between Austria and Turkey. Distinguished Guests, The share and significance of EMEs in the global economy has been on the rise. The share of EME exports in world total exports increased from 13% in 2000 to 23% in 2010.

The answer to the above question lies in the prudential dimension. If the financial intermediaries of the EMEs were able to internalize the macroeconomic risks that arise from the current low interest rate environment, there would be no need for a policy apart from market based return equalization. Since this cannot happen by itself due to agency problems, there is a room for macroprudential policy. Turkey, following the second approach, has been using mainly macroprudential measures along with a relatively low and yet quite flexible interest rate policy in face of volatile short term capital flows.2 The Central Bank and the other government agencies responsible for financial stability, developed new tools and introduced new policies to avoid excessive deviations of the credit growth rates and the exchange rates from economic fundamentals. Examples of macroprudential policies used in Turkey are loan to value restrictions, high risk weights and provisioning requirements on credit with negative externalities, maturity based reserve requirements and leverage based reserve requirements. These policies already helped to start a rebalancing process for domestic and external demand during the rapid post Lehman recovery and the more recent European sovereign debt crisis.3 Distinguished Guests, The financial stability, when lost, has deep and long-term impacts on both employment and growth.4 The cost of preventing a financial crisis is much lower than the cost of living it. The recent developments have reminded us this economic dictum once again. The primary objective of the Central Bank of the Republic of Turkey is to achieve and maintain price stability.