The European Commission used its latest annual progress report on Turkey’s EU membership application to warn that the human rights consequences of the Erdogan administration’s authoritarian rule meant the country’s accession talks were at a standstill, but it also took aim at deepening concerns over the functioning of the country’s market economy.

A sharp deterioration in external financing conditions in 2018—a year in which a currency crisis in the country plunged it into recession and left companies facing piles of foreign currency-denominated debt that threaten to become unrepayable—exposed Turkish vulnerabilities built up over years, it said.

“But a range of policy actions the Turkish authorities took in response only negatively affected the functioning of the markets by interfering with price formation and introducing constraints on the free use of foreign exchange,” the report said.

“Serious backsliding continued in the Turkish economy, leading to deeper concerns over the functioning of the country’s market economy,” it added.

Fight against corruption ‘sorely lacking’
The Commission also underlined its mounting concerns regarding Turkey’s key economic institutions and said the fight against corruption was sorely lacking.

“There was no progress in improving the transparency of state aid,” it said.

Even though the report pointed to serious institutional and structural problems of the Turkish economy—some observers see things as so irretrievably bad that a sovereign default cannot be ruled out—it praised the progress and good level of preparations Ankara has made to cope with competitive pressures and market forces within the EU.

It particularly underlined the improvements made in the energy sector, as well as advances in spending on research and development, education and physical capital.

“However, there are persistent problems with the quality of education and gender equality,” the report added.

In its spring economic forecast, the Commission said Turkey would record the worst growth performance among emerging economies in 2019.

Financial conditions were expected to remain volatile in the first half of the year with interest rates and the stock market entering a more tranquil phase later in the year, it argued.

The Commission forecast that the Turkish economy would contract 2.3% this year but would recover to see a growth rate of 3.9% in 2020.