Clouds have been gathering since April over the prospects of a solution of the Cyprus problem. There was the collapse of the Turkish Cypriot coalition and the subsequent shift in a hardline direction in April; another hardline shift in the Republic of Cyprus (RoC) parliamentary elections in May, as well as the removal of Turkish prime minister Ahmet Davutoglu, with unknown consequences for the future.
Less well-noticed is that Russia is flirting with Israel over exporting natural gas, with the aim of excluding Turkey. This would remove a key incentive for Turkey. The EU incentive is already disappearing with the disintegration of the EU-Turkey refugee deal.
By November, two US heavyweights, US Vice-President Joe Biden and Secretary of State John Kerry, will exit the US administration, and by the end of the year the UN Secretary-General Ban Ki-moon will also be gone. Ban has put a lot of personal capital into the Cyprus problem; his successor may prefer to avoid the ‘poisoned chalice’.
Last but not least, France’s Total is expected to start drilling in January. Judging from previous practice, Turkey will send seismic ships and military vessels and the president, Nicos Anastasiades, will call off the negotiations.
Next year will be lost to RoC presidential election campaigning and by 2018 who knows what the local and regional political scene will look like. It took 12 years to get back to the negotiating table after the Annan Plan.
Given the way local and regional politics is heading, I suspect it will take even longer next time, if there is a next time at all.
The year 2016 is, therefore, the year of the deal. Working backwards, a referendum in December requires a comprehensive text at least two months earlier (October), which means a security and guarantees deal at the UN General Assembly in September, an agreement on territory by July (August is dead), and agreement on property and governance by the end of June.
This means there are four weeks to solve the major domestic aspects of the Cyprus problem. At least a week has just been lost owing to the cancellation of the leaders’ meeting due on May 27.
There are many reasons for solving the Cyprus problem, but since this is, strictly speaking, a column on the economy, let us look at the economic reasons.
As respected economist Marios Clerides explains in this week, the non-performing loan (NPL) problem is not going away any time soon.
Hellenic Bank, which has by far the strongest basis to lend to the economy, managed to increase loans by a mere €84m in the first quarter.
As I explained last week, employment is not increasing, while thousands of jobless have simply been recategorised, giving a false impression that unemployment has been falling.
The 2.7% real GDP growth rate in the first quarter is largely down to luck – a diversion of Russian tourists from Turkey and other tourists from Egypt.
NPLs have also given a short-term boost to demand. I estimate that people buying cars and phones instead of paying their loans back has been worth €1.3bn to the economy. But that will change now that banks are forced, for survival reasons, to implement ‘zero tolerance’.
Even if Cyprus does manage to grow at 2% per year, it will take until 2020 to get back to where we were in 2008. Meanwhile, more young, angry, unemployed men will heed the siren call of ELAM while the more nimble take jobs in the UK.
To change this depressing story Cyprus needs a positive economic shock for the long term.
The only way this can happen any time soon is by opening up this tiny €17bn market to the €650bn Turkish economy next door, with its 6 million outbound tourists per year and its very high demand for energy.