Not the Fed's fault

It was a drastic increase in the base rate - from 4.5 percent straight to 10 percent - and with it, Turkey's central bank in Ankara this week found itself flouting the will of Prime Minister Recep Tayyip Erdogan. Many observers saw the bank's decision as a signal of independence from the monetary authorities.

And the government made its unease clear. Erdogan himself said he rejected any further rate increases - no doubt fearing that higher interest rates would put the brakes on investment and consumption in Turkey, slowing down the economy just before local elections in March.

The pro-government newspaper "Yen Safak" even wrote of an "interest coup" and a victory for the "interest rate lobby": Erdogan-speak for Turkish and foreign investors who allegedly demanded high interest rates with the goal of harming Turkey. The strident tone seemed to mask damage control: The paper warned that the government's growth target of 4 percent could no longer be met this year, leaving Turkish businesses and consumers having to foot the bill. And, it admitted the government had been unable to prevent the lira's fall.

The Fed pulls out

Turkey is by no means the only emerging economy that is feeling the consequences of the latest decision by the Federal Reserve in Washington. India, Brazil, South Africa and other countries are also affected.

They all have benefited in recent years from the fact that international investors sought attractive locations for their money after the Fed drove down US interest rates with multi-billion dollar domestic bond purchases.

But the days of a glut of dollars in emerging markets are coming to an end: The Fed is cutting back on its bond purchases. Now that higher interest rates are looking likely in the US, many investors are pulling their money out of emerging markets. Countries, like Turkey, can indeed try to counteract this with higher interest rates - and thus higher returns for investors - but it will be an uphill struggle.

"The good times are over"

It would be too easy to blame everything on the Fed, says Sinan Ülgen, director of the independent Istanbul think tank EDAM. The Turkish growth model has failed, he said in an interview with DW. It was based on low global interest rates and a correspondingly large amount of capital in Turkey.

"For years, it has been clear that this model would come to an end the moment central banks, like the Fed, started raising interest rates again." The corruption charges against Erdogan's government are also undermining political stability and scaring off other investors, he said.

There is not much Turkey can now do, Ülgen said. In recent years, Ankara failed to make its economy more robust through structural reforms to increase productivity and by improving education. These are long-term changes that have an effect only after a delay of several years, he said, like Germany's unpopular reforms in the early 2000s that ushered in the boom a decade later. In the years of record growth, Turkey failed to institute a similar reform program. "Now it's too late," Ülgen said. "The good times are over."

Erdogan and "Plan B"

Of course, Erdogan sees things quite differently. The economic growth of recent years plays a major role in his strategy for local elections in March and the presidential election in the summer. He voiced his opposition to a rate hike several times. At the same time, he spoke of his government's "Plan B and Plan C" in the event the actions of the central bank had no effect. Newspapers speculate that Erdogan has in mind capital controls, among other things, to prevent the rapid outflow of foreign money.

But this kind of drastic intervention would ultimately inflict even more damage on Turkey, said Emre Deliveli, a business columnist for the "Hurriyet Daily News." In future, investors would then think twice before they put their money into the country, he said.

And capital controls are likely to be highly controversial even in the government. Erdogan would be almost certain to provoke a rebellion of his cabinet's economic experts, such as Finance Minister Mehmet Simsek and Deputy Prime Minister Sali Babacan. "If he actually considers such measures, Deliveli said, "they will go through the roof."