The Cyprus problem

In its “World in 2009” feature the British news magazine The Economist  predicted, “At last, 35 years after the division of Cyprus into a Turkish-Cypriot north and a (legally recognised) Greek Cypriot south, there will be a settlement, based on the notion of a bi-communal, bi-zonal federation.” The publication must already be ruing its forecast.

True, when Mehmet Ali Talat and Demetris Christofias, the leaders of the Turkish and Greek Cypriot communities, first sat down last September, prospects looked better than at any time since 2004, when the Greek Cypriots overwhelmingly rejected the painstakingly negotiated UN Annan Plan that the Turkish Cypriots had earlier endorsed.

The UN, which has handled the “Cyprus problem” since the collapse of the unified state in 1963, three years after independence, and the EU, which made the tactical mistake of allowing the divided island to join in 2004 without insisting on a prior solution, were hopeful. There was the fact that Talat and Christofias, who had ousted his now-deceased nationalist predecessor Tassos Papadopoulos in March presidential elections, share leftist credentials as well as the belief time is running out if there is ever to be a deal to pull the island together.

“The big problem was Christofias saying the Annan Plan was off the table as it had actually sorted out much of the nitty-gritty. Both leaders have essentially had to start from scratch on everything from constitutional issues to property,” says James Ker-Lindsay, a long time Cyprus watcher currently working for the London School of Economics.

Cynics might ask – why bother about Cyprus at all? Over the years, both sides have proven themselves so resistant to reason and compromise that for international diplomats, the problem is second only to the Israel-Palestine dispute for its intractability.

Yet the investment benefits that would accrue from a solution are considerable. Indeed, the best thing that could happen to Cyprus’s economy right now – both south and north of the Green Line – would be a deal. Analysts say it could generate a peace dividend of Euro 1.5bn, benefiting tourism, construction and financial services – without factoring in any benefit from better relations between Turkey and the Greek Cypriots, and Ankara and Brussels, between whom relations have recently been strained (largely because of Cyprus)  A deal would also enable serious off-shore exploration for oil and gas, efforts at which have to date been stymied by Turkish objections that the Greek Cypriots have no authority to take decisions affecting the well-being of all Cypriots.

It would also enable the Turkish Cypriots to open up their relatively fledgling tourist industry to large-scale foreign investment (currently Turkish firms are the main investors). The north could also maximise gains from its six high quality universities that currently – despite their excellence – suffer a lack of international students.

Dimitris Hatziargyrou, the Greek Cypriot deputy high commissioner in London, remains confident. “Both leaders have demonstrated they can talk and are prepared to get down to the nitty gritty,” he says.

Others are not so sure. Talks have already moved onto property – which was always going to be the most divisive area of discussion – without resolving constitutional questions. Divisions have emerged with the Greek Cypriots arguing that Turkish Cypriot demands are essentially confederal, implying the coming together of two states – quite unacceptable given the Greek Cypriot refusal to extend any implied recognition of the TRNC. 

And the endless talking has done nothing to resolve the Catch-22 which has simultaneously been holding back a solution, intensifying northern Cyprus’s isolation and undermining the efforts of Turkey, the north’s only sponsor, to join the EU.

In violation of EU law, Ankara refuses to allow Republic of Cyprus traffic into its ports and airports until Brussels honours its 2004 promise to lift north Cyprus’s isolation by allowing direct trade and direct flights with EU member states. Brussels, in turn, has not been able to overcome the Greek Cypriot refusal to countenance anything conferring legitimacy on the “Turkish Republic of Northern Cyprus,” a state that has received official recognition from only Turkey during its 25-year life.

The deadlock infuriates Huseyin Ozel, official representative for the Turkish Cypriot’s London office, who says the EU should extend direct trade rights to the Turkish Cypriots in recognition of the fact they are the only side to have been actively looking for a solution over the past five years.

“For me as a Cypriot, the fact we cannot export our hellim cheese – almost identical to the halloumi the Greek Cypriots make – is absurd. Is the EU saying that cows from the south are European, but ours are not?”

There is little doubt that the biggest losers have been the island’s estimated 200,000 Turkish Cypriots. The paradoxical legal position of northern Cyprus – within the EU but not subject to its acquis communautaire, or body of laws – has stymied its efforts to close the income gap with the south. A spurt of growth between 2002∞2007, fuelled by construction and tourism initially increased living standards quite dramatically. Figures from YAGA, the north’s independent investment development agency, show that per capita GDP increased from around $4000 to $14,000 – still below the Republic of Cyprus level of around $21,000 but not bad for a state that still depends on the $800m Ankara gives it every year. However the economy has slowed thanks to the Greek Cypriot∞sustained block on external trade (although intra∞sland trade has increased) and to Turkey’s own economic slowdown. Construction has almost halted in the wake of the Greek Cypriot legal case against a British couple, the Orams, which has re∞ignited the many legal uncertainties surrounding property purchase in the north. 

Meanwhile, the south’s membership of the eurozone (the Turkish lira remains the main currency for the north, although the euro also circulates freely) is deepening the divide. Last year the north’s economy contracted by 1.7 percent after a 2.8 percent rise in 2007, with agriculture hit by drought and manufacturing by the lira’s fall against the euro, which has increased import costs.

However the south could also do with the stimulus a deal would bring. The EU recently suggested that along with the Czech Republic, Slovakia and Poland, (south) Cyprus would be one of only a few EU countries to enjoy positive growth, of 1.1 percent, rising to two percent next year. However critics have accused the government of being slow to respond to fears of a business slump, rising unemployment (probably to 5.1 percent by end-2009) and falling confidence. 

“We are expecting a slowdown rather than a recession,” says Dimitris Hatziargyrou, pointing to the latest government forecast of 2.1 percent (the third in as many months, after 3.7 percent and then three percent).

However the recent appreciation of the euro against sterling – by 20 percent in six months – will make 2009 a tough year for tourism and housing, as holidaymakers and homebuyers look to non-euro destinations such as Turkey and Croatia. Construction may be even worse hit, although Hatziargyrou says the expectation is for a “slide, not a crash.”

But time is beginning to run out if a deal is to happen. Parliamentary elections in the north in April benefitted the nationalists, who may slow negotiations, whilst next year Talat himself faces re-election. 

“What’s really needed is a time limit imposed by the international community; otherwise, we could go on talking forever, without any result” says Huseyin Ozel.

Others agree, pointing out that despite his enthusiasm for a deal, Christofias remains politically beholden to Greek Cypriot nationalists in Diko, the party of the late Tassos Papadopoulos. Meanwhile the UN is keeping a very low profile after getting its fingers burned five years ago, when the Greek Cypriots rejected the Annan Plan.

It is possible that the precedent set by the international recognition of Kosovo last year could encourage the Greek Cypriots to be accommodating, through fear that disillusioned Turkish Cypriots push for official recognition, particularly from sympathetic Islamic countries.

“The truth is that neither side wants to be blamed for talks breaking down. The Turkish Cypriots, because they would then be on a road to nowhere but also the Greek Cypriots, who cannot afford a repeat of the international opprobrium they received in 2004, when they rejected Annan but then swanned – without the Turkish Cypriots – into the security of the EU,” says Ker-Lindsay.