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A diplomatic spat between Turkey and the Netherlands has left investors on high alert, as an escalating war of words between Rotterdam and Ankara threatens to expose deeper friction between Europe and the near east.

The diplomatic row was triggered after the Netherlands banned Turkish ministers from campaigning on Dutch soil over an upcoming referendum that could grant Turkish President Recep Tayyip Erdogan more executive powers. Erdogan has since referred to his fellow North Atlantic Treaty Organization (NATO) member as a “Nazi remnant,” setting the stage for further hostilities.[1]

The countries have since threatened economic sanctions against each other. European Union (EU) foreign policy chief Federica Mogherini has advised Turkey to “refrain from excessive statements and actions that rusk further exacerbating the situation.”[2]

The tensions sparked widespread concerns in the financial markets and was partly responsible for taking the wind out of riskier assets earlier this month. Stock markets are typically the first to suffer amid political hostilities. So far, markets have avoided any major selloffs tied to the diplomatic row.

Making matters worse, Turkey has threatened to pull out of the controversial migrant deal that was crafted to stop the free flow of refugees into the EU.[3] The migrant controversy has emboldened European nationalist movements from France to Germany to mobilize support for leaving the EU. Some experts say the breakdown of the migrant deal may sow the seed of further EU disintegration.

Turkey’s constitutional referendum is scheduled for April 16.

The diplomatic row highlights growing challenges for EU lawmakers in containing the spread of populism.  Although Turkey’s actions failed to spring board far-right leader Geert Wilders into power in the recent Dutch election, any threat to the fragile migrant deal will likely hasten calls for increased border protection. That was one of the main arguments of the United Kingdom’s Leave campaign, which successfully convinced voters to exit the EU last summer. Brexit resulted in the biggest-ever selloff in global equities. Markets recorded a staggering $3 trillion in paper losses mere days after the result was announced.[4]

Upcoming elections in France and Germany will serve as a barometer of populism in the wake of the recent Turkish controversy. France heads to the polls at the end of next month. Germany’s election is scheduled for the fall.

[1] Reuters (March 12, 2017). “Netherlands bars Turkish ministers as ‘Nazi remnant’ dispute escalates.” The Guardian.

[2] BBC (March 15, 2017). “Turkey-Netherlands row: Erdogan slams Dutch over Srebrenica.”

[3] Jon Henley (March 13, 2017). “Turkey threatens to pull out of migrant deal as Dutch row intensifies.” The Guardian.

[4] Matthew J. Belvedere (June 28, 2016). “After $3 trillion in post-Brexit paper losses, global markets bounce.” CNBC.

 

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