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The lost opportunities of a Cyprus velvet divorce

By Fiona Mullen

Even before the collapse of the Cyprus negotiations in Mont Pelerin on Monday, the words ‘velvet divorce’ had been creeping up in conversations. The gist of the argument is that Cypriots are incapable of living together, so let’s end the Cyprus problem with a deal to live apart. If this is the game-plan of some of the players, then it is important to look at what is lost by not bringing the island back together in a single federal state.

A chance to be more secure

The first and most important is that it robs Cyprus of the greatest chance it has ever had to become secure. Because of its strategic location, Cyprus has been the ‘collateral damage’ of big-power rivalries for thousands of years. The memory and resentment of this runs deep in the Cypriot psyche.

At present, Turkey does not talk to Egypt, Lebanon does not talk to Israel and Turkey’s rapprochement with Israel is still fragile. Only this week the Turkish president, Recep Tayyip Erdogan, suggested that Israel was “barbaric”. Turkey is also warming up to Greek Cypriots’ long-time ally, Russia.

A united Cyprus would be the only country in a very volatile region that can talk to all of its neighbours. Add in the Cypriot, Egyptian, Israeli and (before long) Lebanese gas, and the importance of Cyprus as a regional broker would be multiplied many times over. Its diplomatic standing would be enhanced and, since it could become both the diplomatic and energy hub in the region, no one would want to mess with Cyprus.

Northern Cyprus would be unlikely to gain EU entry, given that it needs a treaty change and therefore referendums in various EU countries. A velvet divorce is therefore likely to enhance, not diminish, Turkey’s influence over northern Cyprus.

In other words, a united Cyprus makes everyone safer. The alternative is to take a very risky bet on being unaffected by the instability of the countries around us. As someone said to me last week: “If Turkey wanted to, it could send 3,000 migrants to Cyprus tomorrow”. Scary thought.

A chance to address democratic deficit

The second is that it condemns Cyprus to substandard governance for eternity. As a by-product of the Cyprus problem, the president has far fewer checks and balances than internationally, and is, in practice, impossible to remove. We all know that poor governance, and the cosy government-business relations that go with it, were primarily responsible for the economic collapse that robbed citizens of their savings and the young of their future.

A united Cyprus will re-introduce a vice-president, a deputy in the Central Bank of Cyprus (which has suffered endless governance fights) and, more generally, add some competition into the close-knit relations that currently exist. For those who worry that power-sharing will lead to deadlock, be reassured the current and previous negotiators have spent at least eight years ensuring that this system does not fall into the problems of the 1960s.

A chance to gain from the ‘halo effect’

As economists are slowly beginning to realise, markets are at least as emotional as they are rational.  A solution of the Cyprus problem will give Cyprus a ‘halo effect’, bolstered by international media reporting, which would be absent in the event of a velvet divorce. No disrespect to friends in the profession, but in my encounters with international journalists over the years, I have found that, with very few exceptions, they take the path of least resistance. Once a theme has been established (often a bad one for Cyprus), they run with it. Today, a quick look across the major outlets shows that the current theme is ‘failure’. The default theme for a united Cyprus will be ‘success’, creating a ‘halo effect’ that will have a positive impact on investor sentiment.

A chance for the banks

The positive impact on investor sentiment will be even larger if a solution of the Cyprus problem more or less coincides with a Bank of Cyprus (BOC) listing in London, which is expected in early 2017. One of Cyprus’ major disadvantages is that it is simply off the radar for asset managers. Even Iceland gets noticed as a member of the OECD, which Cyprus is unable to join because of the Cyprus problem.

A London listing will allow BOC to raise capital at any time, meaning it can be bolder about making profits. Higher profits turn into higher capital, which allows the bank to cover itself better against non-performing loans (NPLs) and therefore be bolder in lending to the real economy and creating jobs. The halo effect from solving the Cyprus problem will give a major additional boost to BOC.

A chance for tourism cooperation

Last year, more than 1.1 million Turks flew into northern Cyprus from Turkey and 588,000 stayed in overnight tourist accommodation. Another 366,000 flew in from other countries. A united Cyprus will allow travel operators to market all of Cyprus and the great cultural heritage on both sides of the island, instead of competing over parts of it. With greater cultural heritage to offer, Cyprus has a better chance to be an all-year-round destination.

A real chance for natural gas

A united Cyprus could quickly turn the offshore Aphrodite field into revenue. As noted at the East Mediterranean gas conference this week, the natural gas market is currently a tough one, with lots of supply, low prices and competition from coal. Speakers from the industry noted that if opportunities are not taken as they come, then they are lost. They agreed that the only route that is definitely viable at present is to Turkey. Moreover, Turkey has said it will not allow any activity at all in the area it claims to be part of its continental shelf, and has promised to “protect [Turkish Cypriots’] rights and interests” in other areas that cover most of the rest of the Exclusive Economic Zone (EEZ). Under the new US presidency, Turkey may decide to prevent any production at all from Aphrodite. A velvet divorce will only end up in a long row about how to divide natual gas resources.

A chance for the lost generation

Last, but not least, are the multiple opportunities that business people in Cyprus now openly recognise would come about by uniting the island, not dividing it. This gives some hope that jobs will be created for the lost generation of young Cypriots, who emigrated when their professional future on the island disappeared as a result of the financial crisis. Family is important to Cypriots on both sides of the island. Uniting the country can also help reunite Cypriot families.

None of the above will come about via negotiated partition. A velvet divorce would be nothing but a failure of courage and a bad solution for Cyprus.

Fiona Mullen is Director of Sapienta Economics and author of the monthly in-depth Country Analysis Cyprus www.sapientaeconomics.com

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