Overlook Europe's Next Important Referendum at Your Peril

Caught between worries about the French and German elections, investors in European assets are overlooking another major political event: the imminent Turkish referendum on turning the country into a presidential, rather than parliamentary, republic.

Set to take place on April 16 (Easter Sunday), with the holiday in Western Europe and the U.S. deflecting public attention from politics, the referendum could mark the biggest change for Turkey since 1923, when it became a republic.

If the result is a change of regime, its effects could be felt much further than Turkey; it also could reverberate in Europe and even in the U.S. because of its geopolitical implications.

President Recep Tayyip Erdogan effectively has been running Turkey since 2003, when, as head of the ruling Justice and Development Party (AKP), he became prime minister. During the first decade of his regime, Turkey saw strong economic growth and foreign investment and a reduction in poverty.

Erdogan's government invested in the health, education and employment of the poor people in the country, who usually were neglected by the elitist members of previous ruling parties. This is how Erdogan has built a loyal following among many Turks, both at home and abroad.

But his regime has become increasingly autocratic. Numerous police chiefs were sacked in 2013 during a purge of people that Erdogan considered to be close to influential U.S.-based Muslim cleric Fethullah Gulen, a former ally of his. This action came after mass protests against plans to concrete over and develop one of Istanbul's few green parks.

After winning the country's first popular vote for the position of president in 2014 (the president was elected by parliament before then), Erdogan changed that largely ceremonial role into a more hands-on, involved style of presidency. The purge of dissenters continued.

Last July, thousands of soldiers and judges were arrested following a coup attempt that President Erdogan said was inspired by Gulen. More than a dozen TV stations were closed and many journalists are in jail; Turkey ranks 151 of 180 countries in the Reporters Without Borders press freedom index.

If he wins the referendum, Erdogan will tighten his already-strong grip on power. His critics within Turkey already speak in whispers and are afraid of being quoted by name, while the major countries that could put some external pressure on him to respect human rights and democracy are reluctant to do so because of Turkey's important role in the Syrian conflict.

Investors should worry if Sunday's referendum turns Turkey into a presidential republic. Unlike in the U.S., where the courts, parliament and media are strong enough to challenge the president's decisions, in Turkey President Erdogan would have free rein.

He already has threatened to back away from an agreement that Turkey signed in November 2015 to host refugees from Syria in exchange for €3 billion ($3.18 billion) and concessions on stalled European Union accession talks. If Erdogan, emboldened by a positive referendum result, decides to follow through on his threats, he could cause serious trouble for the French and the Germans.

Populist parties have seen a retreat in Europe since the Brexit vote, with the Dutch elections last month showing decreasing appetite for extremism. The Turkish referendum could be a step toward reversing that trend just before crucial elections in the eurozone's two biggest members.

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