Turkey's political crisis tests EU ties, democracy

By Daniel Bases and Gareth Jones

ANKARA (Reuters) - Turkey's future in the European Union and its position in the global financial system stand on a precipice, with army demands that religion and politics be kept apart raising fears of a coup that could stymie reforms.

Efforts to elect a new president are mired in crisis after opposition lawmakers mounted a legal challenge to block ruling AK Party candidate, Foreign Minister Abdullah Gul, whose roots in political Islam have sparked mass secularist protests.

Analysts say that a coup today remains very unlikely but a terse army intervention in parliament's election of the next president has raised questions about Turkish democracy and EU prospects and could harm hard-earned economic stability.

"Basically we believe this is undermining Turkish chances of joining the EU by about five years if this continues," said Teymur Huseynov, head of the Eurasia division at Exclusive Analysis, a political risk consultancy in London.

"If there is a coup, it is basically a disaster for the country. You will see the stock market crashing, foreign investors' money just going back," he said, adding it would also damage the military establishment's image at home and abroad.

The army, seen as the final guarantor of the secular state, has ousted four governments in the last 50 years, most recently in 1997 when it acted against a cabinet in which Gul served.

The EU, which started accession talks with Ankara in late 2005, is viewed along with the International Monetary Fund (IMF) as a crucial anchor for economic and political stability.

Prime Minister Tayyip Erdogan's ruling AK Party has championed reforms aimed at preparing the large, relatively poor Muslim country of 74 million for eventual membership.

Turkey is certainly in a far stronger position today than in 2001, when a financial crisis lopped 10 percent off the economy and helped sweep the AK Party to election victory in 2002.

"The big difference now is that we have the EU and IMF anchors and a strong single-party government, not an unwieldy coalition," said Wolfango Piccoli, a Turkey expert at Eurasia Group, a political risk consultancy in London.

Foreigners have pumped billions of dollars into the country in recent years. The Istanbul stock exchange was trading at historic highs only last week, just before the crisis erupted.

LOSS OF EU CLOUT

The EU strongly backed the government at the weekend, telling the army to stay out of politics. Erdogan has chipped away at the army's powers as part of its EU accession process.

However, the EU has lost influence in Turkey, where public opinion has turned eurosceptic amid rows over Cyprus and other issues. Many Turks feel the EU does not want to admit Turkey.

"The army statement last Friday is the clearest possible signal of how insignificant the EU has become in Turkey," said Cengiz Aktar, an EU expert at Istanbul's Bahcesehir University.