October 4, 2005 - 1:05 AM

Turkey's EU talks delight investors despite landmines

By Paul Taylor

BRUSSELS (Reuters) - The European Union began the long, hard slog of entry negotiations on Tuesday with Turkey, the biggest and most challenging candidate it has ever tried to absorb.

Financial markets celebrated the start of talks, with Turkish shares jumping 3.86 percent to close at a record high and the lira and bonds also rallying.

This reflected soaring investor confidence in a country that now has its feet firmly on the ladder to eventual membership of the wealthy western bloc.

The market euphoria contrasted with a more sour political mood on both sides after the historic handshakes, as politicians pointed to landmines awaiting Turkey and the EU on the bumpy road to an uncertain marriage first promised 42 years ago.

Turkish Foreign Minister Abdullah Gul, who flew to Luxembourg after midnight to launch the negotiations with the 25 EU foreign ministers, told reporters Turkey would not change its stance on Cyprus -- a major obstacle in its accession process -- until there was a peace deal on the divided island.

"There will be no change in our position today until there is a lasting settlement on Cyprus," Gul told a news conference in Luxembourg. He and Cypriot Foreign Minister George Iacovou avoided shaking hands at the opening ceremony.

Cyprus warned that Turkey should not expect an easy ride.

"The 25 member states of the EU aren't ready to roll out the red carpet for Turkey to walk over on its own terms," said Kypros Chrysostomides, a spokesman for Cyprus's Greek Cypriot government which Turkey refuses to recognise.

Opponents of Turkish membership lost no time in declaring either that the EU had made a historic mistake with far-reaching consequences, or that Ankara would never join anyway, while the media expressed its doubts.

"A BIG MAYBE"

Former French President Valery Giscard d'Estaing, the father of the EU's stalled constitution, said he was surprised and saddened by the decision to start negotiations, which he argued ignored the views of Europe's citizens.

"The French people said four months ago 'We are against Turkey's entry' and here we are, four months later, and it's happening," he told RTL radio, referring to the French referendum vote last May rejecting the European constitution.

However, French President Jacques Chirac reiterated his support for Turkey's accession to the European Union, but said Ankara must conform to the bloc's values if it wants negotiations to result in full membership.

He also made a veiled attack on domestic critics, saying opponents of Turkey's entry were trying to prejudge the issue and take decisions that belonged to future generations.

Austria gloated that it had made life harder for Turkey by forcing the EU to spell out that Europe's capacity to absorb such a vast, poor, populous country financially and institutionally was a "condition of membership".

Senior German conservative politician Edmund Stoiber said he expected talks with the overwhelmingly Muslim country to end in a status short of full membership.

"I believe the open-ended negotiations will make it possible to change course together later to achieve a different form of cooperation," he told reporters in Munich, noting that the conditions for the talks were unprecedentedly tough.

A headline in Danish daily Berlingske Tidende -- "EU gives Turkey a big Maybe" -- epitomised a widespread European media belief that the talks could be easily derailed.

Even British Foreign Secretary Jack Straw, an outspoken champion of Turkish accession, pointed to difficulties in store.

"LONG ROAD AHEAD"

Straw, who chaired the crucial talks on behalf of the EU's British presidency, said he had no doubt that Europe would benefit hugely from welcoming "a strong, secular state, which happens to have a Muslim majority into the European Union".

But he added after haggling for 40 hours with Austria, Cyprus and Turkey to clinch agreement on the negotiating framework: "This is the start of a negotiation process, far from it's finish. It is going to be a long road ahead."

Turkey, with a fast-growing population of 72 million, now faces a marathon effort to adapt its political, economic and social system and implement 80,000 pages of EU law.

EU Enlargement Commissioner Olli Rehn said he would visit Ankara on Thursday and Friday to discuss practical arrangements for the talks, which begin with the screening of Turkish law for its compatibility with EU legislation, starting on October 20.

EU officials said the process could soon run into trouble if Turkey fails to open its ports and airports to traffic from Cyprus by next year, as the EU has demanded.

Such risks did not deter investors, who take a long view of a huge emerging market's prospects of stability and prosperity.

Credit ratings agency Fitch said the start of Turkey's talks should boost market confidence and encourage policy discipline, underpinning structural reforms and attracting foreign capital.

(Additional reporting by Daren Butler in Istanbul, Marie-Louise Moller in Luxembourg, Jon Boyle in Paris and Michele Kambas in Nicosia)