Cyprus: Divided they fall

11:20 7/5/2013 - Πηγή: BankWars

CYPRUS, it is said, never misses an opportunity to miss an opportunity. After its euro bail-out, that needs to change, not least for the sake of its battered economy. Cypriots face the grim reality that, thanks mainly to the collapse of much of their financial-services industry, GDP will shrink

by 15% this year, another 15% in 2014, and perhaps 5% more in 2015. That is a comparable drop to 1974-75, after a Greek-backed coup followed by a Turkish invasion led to the island’s partition into a Greek-Cypriot-controlled south and a Turkish-Cypriot-controlled north.

It will take years of hardship and painful structural reforms before Cyprus’s GDP returns to anywhere near its level before the bail-out. Unlike the rest of the euro zone’s beleaguered periphery, however, Cyprus has two promising sources of growth waiting to be tapped. One is the recently discovered Aphrodite gasfield in the eastern Mediterranean. The other is its tourism industry, which is underdeveloped and has plenty of scope for foreign investment. The best way for Cyprus to exploit both as fast as possible would be to patch up its 40-year-old division.

Nobody knows just how much gas lies off the coast. The economics and politics of extracting and selling it are tricky. What is clear is that both will be a lot harder without a Cyprus settlement: not just because Turkey and the Turkish-Cypriots are laying claim to the gasfield and want a share of the proceeds, but also because the obvious and cheapest way of exporting the gas would be through a new pipeline to Turkey itself. In short, the gasfield has created a big new incentive for unifying the island.

So should the potential boost to GDP. Most of the large majority of Greek-Cypriots who voted heavily against the last big attempt at unification, the UN’s Annan plan, in 2004 did so because they were about to join the European Union and felt their future bargaining position would be stronger. But many also feared being saddled, like West Germans in 1990, with costly transfers to a poorer north. Yet a relatively strong Turkish economy, combined with the shrinkage in Greek-Cypriot incomes, is fast narrowing the gap. And it is not a zero-sum game: independent studies suggest that the whole island’s GDP might be boosted by three percentage points a year for the five years after a settlement, a gain that translates into around €5,500 ($7,150) for every Cypriot household.

Aphrodite’s elusive prize

In difficult times, that is valuable. The arrival of Nicos Anastasiades as president should also help, as he was one of the only Greek-Cypriot political leaders who voted for the Annan plan. Desultory talks over the past three years have confirmed that the Turkish-Cypriot leader, Dervis Eroglu, is a fierce nationalist who has no love for the Annan plan, even though most Turkish-Cypriots backed it in 2004. But his patron, Turkey, still aspires to join the EU, which it cannot do so long as Cyprus stays divided. If Mr Anastasiades can show enough negotiating flexibility, Mr Eroglu is hardly in a position to reject a new settlement that grows out of the Annan plan.

It is tempting to suggest a ramping up of outside pressure to revive the talks, whether from the EU, from Britain as the former colonial power, or from Greece and Turkey. But just as experience has demonstrated that Cypriots miss opportunities, so it has also shown that they hate being told what to do. Mr Anastasiades and Mr Eroglu have good reasons of their own to go for the prize. A combination of Cyprus’s economic meltdown and the Aphrodite gasfield should be enough to justify a new attempt.

Πηγή: The Economist