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Money issues cool optimism for a Cyprus settlement.

Over the last three weeks the statements by officials on the economic aspects of a Cyprus settlement have curbed optimism that a settlement can be negotiated, and if negotiated, can be approved by the people in a referendum. Furthermore it is unclear that the implementation of the agreement can be financed. Yet concurrently it is generally acknowledged that Cyprus settlement will be beneficial to all the residents of the island, as well as for Turkey, Greece and Europe.

This contradiction arises from the fact that the negotiations themselves do not fully consider the economic implications of what is agreed and who will pay for what, and the fact that implementation of a settlement depends on having sufficient financial resources. For the peace process to succeed there has to be well financed planning, and economic growth. Fortunately, the investment required for implementation will in itself generate economic growth. But the key question is how a settlement can be financed, and a positive result in twin referenda achieved?

Recent developments that have cooled expectations are as follows:

(1) The presentation on February 11 of the findings of a two-day workshop organised by the Turkish Cypriot Chamber of Commerce on a major programme entitled the "Turkish Cypriot Economy in Federal Cyprus" which focused on business adjustments to the EU acquis communautaire.

(2) Statements by the European Commission Vice President Valdis Dombrovskis Commissioner, who is also Commissioner for the "Euro and social Dialogue", who visited Cyprus from March 3-5 and stressed stability in the economy, economic convergence between the Greek Cypriot (GCC) and Turkish Cypriot Communities (TCC), and fiscal viability, but not the financing of a Cyprus settlement.

(3) Concurrent missions by the World Bank (IBRD) and the International Monetary Fund (IMF) to Cyprus at the end of February to gather data for their analysis and recommendations regarding the economics of a Cyprus settlement, which gave rise to press reports(Phileleftheros February 29) that such an agreement will not attract significant donor funding, and that the cost of compensation must be reduced (primarily through territorial adjustment, restitution of property and contributions by current users).

These developments are discussed in more detail below, but what is evident is that the EU, IBRD and IMF are not concentrating on how the implementation of a Cyprus settlement can be financed.

The TCC Chamber of Commerce and the project manager, Dr Omer Gokcekus, must be congratulated on their efforts to organise how the TCC can adopt the EU acquis communautaire following a Cyprus settlement, through a comprehensive action plan. However, several speakers at the presentation emphasised the need for derogations for a long period of time (five to seven years were mentioned). The implication being that insufficient progress was made on the 2009 TCC programme for adopting the acquis. Such long derogation periods and a lack of common product standards on the island will mean that a single market cannot be created quickly in Cyprus, and that TCC businesses will be at a disadvantage.

If a Cyprus settlement is reached in 2016, the delay in the adoption of the acquis by the TCC will cause numerous problems and negatively affect both internal trade relations, and exports to the EU. Since the GCC have already gone through this process of adaptation of laws and standards, it would make sense for the two leaders to encourage cooperation on the acquis to speed things up.

Dombrovskis in an interview with Phileleftheros stated that Cyprus should focus on maintaining economic stability following the end of the memorandum programme, and not just concentrate on recovery. While on a Cyprus settlement, he stated that the "Commission will bear in mind the special situation in the country."

He did not, however, mention financial assistance for implementing a solution, but did state that "technical assistance" will be provided, which has been assigned to the Structural Reform Service (SRSS). Stress was placed on the need for Cyprus "to undertake its obligations as a member of the EU and the Eurozone". Overall, it was not very encouraging for the financing of the implementation of a Cyprus settlement.

With respect to the Cyprus talks Dombrovskis stated that the European Commission had begun work on the monetary and fiscal aspects of a solution, the management of implementation, the institutional structure of the federated state, and stressed monetary stability and viability. He finished his interview by stating that the most important issue is the application of the acquis for the whole island.

Essentially, the European Commission does not seem to have realised that the most important issue is the successful implementation of the Cyprus Settlement Agreement, and the impression given is that the EU is concerned with the application of its rules and not with the successful resolution of the Cyprus problem.

The IBRD/IMF missions to Cyprus that followed the above threw more cold water on expectations by stating that the financing of a solution will not attract significant donor funds. This implies that the EU does not plan to provide substantial funds for the implementation of the expected solution. The key to the financing problem was considered to the compensation, which is estimated by local and foreign experts to be the largest component of cost, and which they believe should be reduced. This could be done by territorial adjustment, emphasis on property restitution rather than compensation, and by current users that have gained property contributing to compensation. All these issues are difficult politically, and will tend to make a positive referendum vote difficult in both communities.

On a more positive note the IBRD/IMF missions emphasised that the economy should be integrated into a united market and separation should be avoided. But again gave no clue on what financial assistance would be available. It should be recalled that the 2004 donor's conference organised by the UN raised commitments for less than e1/41 billion, of which $500 million came from the USA, e1/4259 million from the EU and smaller amounts from other countries.

It should be emphasised that the negotiation process itself should be designed to reduce costs in addition to reaching agreement, and that every effort should be made to ensure that the EU provides adequate support as it did to Northern Ireland which had less need for external assistance.

Costas Apostolides is an economist

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Publication:Cyprus Mail (Cyprus)
Geographic Code:4EXCY
Date:Mar 20, 2016
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