The following article from Business Week offers a good review of most of the main themes of the Turkish economy and its prospects in the event of a Turkish invasion of northern Iraq.
The article finishes on a positive note with a comment by the AKP appointed treasury minister and former Merrill Lynch economist, Mehmet Simsek. Simsek believes that the Turkish economy has become sufficiently strong to carry the economic burdens that will inevitably surface in the [unlikely] event Turkey were to invade northern Iraq. While this certainly makes good print for the Turkish electorate and foreign investors, this observer is skeptical that Turkey's economy is really as firmly situated as the treasury minister suggests.
It seems rather odd that the author of this Business Week article chooses to end with Simsek's comment given his tacit reference to the debilitating economic circle Turkey would enter if it were to invade Iraq. A Turkish invasion of Iraq would cause global oil prices to explode and the U.S. stock market would take a further dive as a result. In this scenario, the Turkish economy would likely be impacted in three main regards.
I.) A fall in the U.S. stock market would cause the lira to loose strength relative to the dollar as it always does when there is economic uncertainty in the U.S. The Turkish economy would therefore be forced to pay even more dearly for the higher oil prices for which the Turkish invasion was originally responsible.
II.) Higher oil prices would have to negatively affect the global economy at some point. While Turkish exports might become cheaper in an invasion scenario, there would most likely be fewer buyers for these products.
III.) Since when do foreign investors flock to countries at war? A "bumpy ride" would assume that the Turkish military could eventually destroy every last whimper of PKK support. The possibility of that happening is zero. Whereas the chance of bombs going off in Izmir in the aftermath of an invasion is tremendous. A war in the south-east would also discourage tourism and depress real estate values, which are largely supported by foreign investment. The country's deficit, which would be already exacerbated by higher oil costs, will also be widened by greater military spending.
Turkey's political leadership may pretend that their actual reason for delaying the Turkish invasion of northern Iraq was in order to extract concessions and greater support from the U.S. There is no doubt that the Turkish government has played a solid hand of poker with its string of ultimatums. However, it is the opinion of this observer that the country's leadership is privately aware that the economy cannot overcome a war and the effects of its aftermath. The economy has certainly come a long way in less than a decade, but it has not reached a point where its fundamentals are truly sound.