Five year window to solve Cyprus divisions?

Tony Barber, the FT’s European editor, raises an intriguing question in the FT of 19 February 2013. He argues that the present economic crisis in the Republic of Cyprus may offer an opportunity to solve the island’s divisions (see De Facto partition).


He writes,


Cyprus’ emergency offer European leaders the best chance in almost 40 years to overcome the island’s division. … Europe’s leaders have a chance to tell the Greek Cypriots, in a friendly but firm way, that financial aid requires progress on a diplomatic settlement.


The argument behind Barber’s assertion goes firstly, Cyprus’s financial and banking crisis gives the EU and IMF considerable leverage over the Cypriot government; secondly, that the elections in progress that have placed presidential candidate and pro-UN Annan unification Plan advocate, Nicos Anastasiades, as the frontrunner in next Sunday’s second round run-off, and thirdly that within five years the communist AKEL party may be back in power – having benefitted from the unpopularity of foreign imposed austerity that its government of Demetris Christofias fostered through its incompetence – and the substantial finds of natural gas in the Levant Basin will then have started to flow, guaranteeing the financial autonomy of Greek Cypriot Cyprus.


The details of the bailout are still being worked out and different alternatives to the solution of the bank and sovereign debt crisis have been put forward. These consist of basically giving a haircut to bondholders (i.e. imposing losses) – which goes against the EU promise that this solution in Greece was a one-off event and would worsen the position of Cyprus’ troubled banks (as they are major holders of sovereign debt) – or to impose some kind of penalty on deposit holders – particularly on the ‘dodgy oligarchs’ with their massive Cyprus bank holdings (see the Russian Connection).


In effect the bailout raises issues about the sustainability of Cyprus’ very successful growth model of residential tourism and off-shore banking centre. There is considerable EU unhappiness with Cyprus’s level of corporate tax (10%) and the adequacy of its money-laundering supervision. Without the tax incentives the Russian money will go elsewhere and a property correction could scare off new tourists.


Barber believes that the outlines of a diplomatic settlement between North and South are clear:


A two-zone federal state with a common citizenship , and compromises on territorial and property disputes. (On property issues see Peristerona.)


It will be interesting to see if this putative opportunity is recognized, let alone seized, by the new government and its EU partners.


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