Euro area: How vulnerable is Europe to the Turkish havoc?
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In light of the Turkish turmoil, we take a closer look at EU-Turkey ties in this document, focusing especially on the financial, economic and political links.
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EU banks' exposure to Turkish assets is limited and we would be surprised to see the ECB reacting to the Turkey crisis with any policy measures.
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Trade and FDI links are of a relatively modest scale, limiting the possible risks to the euro area growth outlook from this channel.
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If the crisis escalates further, the EU might find itself pressured to consider support measures for Turkey, as the country has become an important puzzle in the European migration strategy.
Financial links: limited spillover
Both the euro and periphery bond yields have recently come under increased pressure among growing fears about contagion from the Turkish turmoil to the European financial system more broadly. Reports that regulators at the Single Supervisory Mechanism of the ECB have growing concerns about some EU banks' exposure to Turkey further fuelled the risk-off mood.
From an EU perspective, Spanish and French banks stand out as particularly exposed to Turkish assets, especially in the non-bank private sector. However, putting the absolute numbers into perspective, as a share of total banking sector assets the exposures are small (around 2.0% of total banking sector assets for Spain and less than 0.5% for France, Italy and Germany).
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
