I have spent the best part of the last 13 years trying to do my bit for a federal solution of the Cyprus problem, so writing this article feels like committing a cardinal sin.
But for the many and multiplying reasons I have written about elsewhere, time has almost run out for solving the Cyprus problem any time this decade.
I am therefore going to take a first bite (only, since I am technically on holiday) at the notion of a velvet divorce, first reported by the Cyprus Weekly a couple of weeks ago.
“One devolution process envisaged would see good neighbourly relations between the two distinct political entities of the island, with Turkish Cypriots perhaps taking European Economic Area (EEA) status with the support of Greek Cypriots,” it said.
Let’s assume for a moment that Cypriots on both sides of the island, as well as EU and EEA member states, can accept this idea. Would it be good for the Turkish Cypriot economy?
I believe it could be, with some qualifications.
One positive aspect is that EEA membership would still give Turkish Cypriots full access to the single market for those who meet the standards—something they do not have now. It would therefore create strong incentives for producers to meet EU quality requirements and expand their markets.
EEA membership would also entail free movement of people, so should not have any material impact on Turkish Cypriots who hold Republic of Cyprus passports.
EEA also means banks operating in northern Cyprus will not have to meet eurozone regulatory requirements unless they want to do business across borders.
Having had a good look at the Turkish Cypriot banks, I am not that concerned about this. Turkish Cypriot banks do not have massive non-performing loans like the big banks in the south, they are more liquid and, notwithstanding possible differences in definitions, they seem well capitalised.
Not having to meet the ever-shifting goalposts of the eurozone banking system will actually be good for bank profitability, although it might also slow down a much needed consolidation of the sector.
Under EEA, Turkish Cypriots would not have to meet the EU’s strict fiscal targets via the Stability and Growth Pact. If you are a fiscal hawk, you will see this as a bad thing. Turkey has been leaning hard on the Turkish Cypriots to tighten up on fiscal discipline, so with no eurozone carrot and stick at the end of the process, cutting back on bloated public spending will be more difficult.
On the other hand, not joining the eurozone also means avoiding the kind of boom-bust scenario, triggered by a sudden drop in interest rates, that has been typical of eurozone periphery economies.
I still hope for a united federal Cyprus as I don’t think the scars can heal without it. But just like with the UK, the EEA might just be the second best option I personally could live with.