Turkey’s currency has collapsed in value over the past week, with the lira losing 10 percent against the US dollar yesterday alone.
Clemens Fuest, head of the Ifo Institute think-tank, urged Turkey’s government to tackle the crisis before it gets even worse.
He blamed the economic policies of long-running president Recep Tayyip Erdogan for exacerbating Turkey’s financial woes.
The turmoil has played out against the backdrop of soaring diplomatic tensions between Ankara and the West.
Mr Fuest said: “We have serious cause to worry. The crisis in Turkey is a classic economic and currency crisis.
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“Erdogan’s policies have been putting pressure on the country’s economy for several years.
“The conflicts with the EU and the US are unsettling investors.
“Erdogan has responded with economic policy measures, especially in the form of state loan guarantees and very expansionary monetary policy.
“He put pressure on the central bank to cut interest rates, which undermined the independence of the central bank.
“In 2017, this led to high growth, but that was just a flash in the pan. Now it has burned out.
“The inflation rate has exploded, confidence is shaken.”
Mr Fuest warned that Europe would face the consequences if the lira declines in value even further.
He told German newspaper Handelsblatt: “It is in the interest of Europe to prevent an economic crash in Turkey.
“Turkey is an important trading partner and a Nato member. Despite conflicts, it remains an important factor for political stability in the Middle East.
“Turkey should apply for assistance from the International Monetary Fund, and the Europeans should support this path.”
His comments came after warnings from other German officials that the crisis could spark a recession in Turkey.
Joachim Lang, the head of Germany‘s Federation of Industries, said: “The recent fiscal developments in Turkey are a reflection of a crisis of confidence.
The Turkish economy is suffering from the weak currency, high inflation and rising external debt.
“There is a threat of recession if financial stability is not restored.
“Only a stable political environment can win the trust of foreign investors and exploit the existing potential of the Turkish economy.”
Additional reporting by Monika Pallenberg