PCC report 'The Cyprus Peace Dividend' mentioned in the Financial Times today 13.01.16


13 January 2016

​Cyprus finance minister warns on fiscal rules for reunited island - Tony Barber in Nicosia

Any deal to reunite Cyprus risks failure unless the new federal state envisaged under a peace settlement adopts binding rules on fiscal discipline and financial sector stability, Harris Georgiades, Cyprus's finance minister, has warned.

In an interview with the Financial Times, Mr Georgiades said the new Cyprus must have a balanced budget clause in its constitution that would impose fiscal responsibility not only on the federal government but on the autonomous Greek Cypriot and Turkish Cypriot entities that would run most day-to-day affairs in the island's two communities.

It is a measure of the optimism surrounding the latest peace talks that Cypriot policymakers are giving serious attention to such technical matters. The International Monetary Fund, World Bank, European Central Bank and the European Commission are already supplying advice on the economic and financial aspects of reunification as the latest diplomatic efforts to end the Cyprus dispute, which date as far back as 1963, begin to bear fruit.

"It is imperative that the new union doesn't allow itself to face fiscal issues and that one of the two constituent states doesn't steer off course, because the federal union itself would then be in trouble," Mr Georgiades said.

He had in mind primarily the future Turkish Cypriot entity, which might struggle to begin with because the Turkish Cypriots have relied heavily on Ankara for financial help ever since Turkey invaded the island in 1974. They would need international financial support over a transitional period before operating under strict new fiscal rules on their own, he said.

The Turkish Cypriot banking sector would also need close attention, he said. "It's a bit of a wild-west situation. Nobody knows enough about ownership, capitalisation and supervision in the Turkish Cypriot banking system," he said.

Even so, Mr Georgiades said he considered reunification, in principle, as "a win-win situation" for both Greek and Turkish Cypriots. The former, who control Cyprus's internationally recognised government, would benefit not only from the ability to conduct business across the entire island but from gaining access to the huge domestic market of Turkey, which is currently closed to them. "At the moment, it's as if we don't exist for Turkey and Turkey doesn't exist for us," he said.

Mr Georgiades estimated that the Greek Cypriot shipping industry, which makes a direct contribution of about 7 per cent to Cyprus's economy, would double its business overnight if a peace settlement was reached.

The poorer Turkish Cypriots, whose self-proclaimed state in the north of the island is recognised by no country except Turkey, would benefit from access to the EU market and EU regional aid funds. Crucially, the Turkish Cypriots would enjoy "the free and unobstructed ability to engage in commercial and economic activity legally and openly with the outside world", Mr Georgiades said.

According to an independent 2014 study, "The Cyprus Peace Dividend", a peace deal would give such a boost to Cyprus's economy that all-island economic output would rise to about €45bn by 2035 from about €20bn in 2012. Gross domestic product per capita would rise to €28,000 from €17,000.

One particularly mouth-watering prospect is the potential bonanza from large natural gas reserves discovered since 2011 off Cyprus's coast. However, Mr Georgiades said it was too soon to speak of exporting the gas via a pipeline to and through Turkey. "First things first. Currently, we cannot even export olive oil to Turkey, let alone petroleum, oil or natural gas," he observed.

The prospective financial gains from reunification may be attractive to many Greek Cypriots, whose government required an emergency EU-IMF rescue in 2013 after the banking sector collapsed because of Cyprus's exposure to Greece and an unsustainable financial bubble on the island.

Cyprus is due to leave its three-year EU-IMF aid programme at the end of March, with its economy returning to growth and its budget almost in balance. But its banks are still burdened with a heavy load of non-performing loans. "It wouldn't have been possible to make a last push for reunification while engulfed in the worst financial and economic crisis we've ever faced," Mr Georgiades said.

To download the report go here​