Solving the Insolubles: The Euro’s Fate and the Reunification of Cyprus

Two seemingly unrelated issues, the on-going negotiations for reunification of Cyprus and the fate of Euro, had been competing for being the subject of this post during the last week and last Saturday I thought I finally made a decision between the two. I was going to write about the latest round of negotiations aiming to reunify Cyprus. But as I sat down to write this post, there were an increasing number of reports arguing that this week will possibly be the worst of the last three years (since the days after Lehman’s demise in 2008) for the international financial markets and mark beginning of yet another global recession. The Euro’s fate was once again being questioned, and whether Italy, and possibly Spain, would go down the path of Greece and how the ECB and the Eurozone and other EU countries would react.  Thus I was pondering whether I should buy gold or open a bank account in Swiss francs and it suddenly occurred to me that in fact the two issues were related as the EU’s inertia was negatively contributing to both. In essence, both issues’ seeming intractability was largely due to the fact that the EU’s governance structures are not robust enough to bring about sustainable and long term solutions to the Union’s troubles.

It’s clear that the markets are not sure whether the Eurozone countries are likely to stick together in the case of worst scenario materialising. And that worst case scenario is that Italy and Spain could fail to calm down the financial markets and seek help from the European Financial Stability Facility (EFSF) which would not have enough funds to cover needs of both. So there is an increasing likelihood that the EU, and particularly the ECB (European Central Bank) and Eurozone members, may soon need to decide whether to save or break the currency union. And what they have been doing thus far seems to be finding temporary solutions and muddling through. In the case of Cyprus’s reunification negotiations, the EU’s role and responsibility are not that clear-cut, the actors whose cooperation needed for resolution of the Cyprus conflict are not just the Cypriots and the EU (the cooperation of Greece, Turkey and the UK are also required).  It is also the case that the Cypriot reunification negotiations are being mediated by the UN; the Cyprus conflict is, however, an EU problem since the de facto divided island joined the Union in 2004 after an EU and UN backed attempt failed at reunifying the Greek and Turkish Cypriot parts of the island under a federal power-sharing structure. The Cyprus conflict’s persistence harms EU’s interests in two main respects. First, some of the Union’s strategic objectives are compromised as Turkey, who refuses to deal with the Greek Cypriots (who represent the whole island in the EU), blocks the EU-NATO cooperation and the Greek Cypriots vetoes the progress of Turkey’s EU accession talks in order to gain leverage against Turkey and the Turkish Cypriots. Second, the EU’s diplomatic credibility is being harmed and it’s hard to see how the EU can possibly claim or assume a role in resolution of the world’s intractable conflicts, such as the likes of Israel-Palestine and Kashmir, while it can’t even tackle the relatively less intractable Cyprus conflict.

So if there is a case, as I have tried to argue above, that the EU needs to tackle both of these issues more robustly and expediently, what does hinder it from doing so?  The main reason seems to be the fact that EU’s has been caught in the middle of somewhere between becoming a full-fledged federation and a typical intergovernmental organisation. The Euro’s future seems to be in danger since there is no consensus among its northern members whether they should contribute towards, and possibly guarantee, the debts the Mediterranean EU nations.  The reasonable solution is to set up a EU Monetary Fund, or a EU Finance Ministry, that goes beyond the current plans to turn the EFSF into a permanent organisation under the name of European Stability Mechanism to bail out EU nations that are in trouble, and the new EU body should be able to meet all funding needs of Eurozone nations in trouble (currently, the EFSF can provide up to €440 billion in funds) and  audit finances of Eurozone nations who run budget deficits and even require those running deficits to seek approval of the European Parliament for passing their national budgets. The underlying assumption of this possible solution is that it makes clear that the Eurozone nations will stick together whatever the cost may be, and if this message is signalled strongly it’s very likely that the markets would calm down and therefore most funds would not ever be needed.

At first glance, ascribing a positive role for the EU in bringing about the Cypriot reunification seems tricky, but that is doable as well. Since the EU’s positive contribution to the Cypriot reunification negotiations in 2004 were not materialised as the Greek Cypriots were allowed to join the Union without agreeing to the UN brokered comprehensive peace proposal, this time around the EU needs to make it clear to both Cypriot sides that there will be an apportionment of the blame and tangible consequences for spoilers in the case of failure. And this policy should, ideally, be pursued by a credible EU body or institution, but neither the EU commission nor other EU bodies are not well positioned for this task as the Greek Cypriots and Greece are represented in these bodies, hence it’s not realistic to expect these EU bodies to deliver on this issue. What remains as an alternative is that EU nations, especially the major ones, collectively and repeatedly pressuring the Cypriots and their motherlands to reach an agreement by making clear that whoever messes up the process would face international isolation. For the Turkish Cypriots and Turkey, the resolution of the conflict seems to be a strong enough incentive as both seek EU membership and can’t get in unless the conflict is resolved. The Greek-Greek Cypriot case seems rather complicated, but the accounts of the failed Annan Plan process tell us enough, Claire Palley, the Greek Cypriot negotiation team’s then legal adviser noted that they mainly agreed to the UN’s arbitration and referendum in 2004 because: “ The international furore had his [UNSG] good offices been rejected would have been so damaging  that the Republic of Cyprus’s [i.e. the Greek Cypriot government] position as the State of Cyprus could have been thrown to reconsideration by angered States.” (Palley 2005, p. 103 footnote #19) Thus there is reason to believe that if a similar amount of international pressure, especially by the major EU nations, is exercised the Greek Cypriots are likely to submit to the process and accept its outcome. And there is the opportunity to implement this policy as well, the UN Secretary-General (UNSG) Ban Ki-Moon when he met the Greek and Turkish Cypriot leaders in Geneva in July declared his intention to convene an international conference after October this year when the Cypriots finish two months of intensive negotiations. However, it is not realistic to expect that the UNSG will ever succeed without the EU (which seems to be the only actor with leverage over all of the parties) fully backing up his efforts. Therefore there is a case for urgent and forceful EU intervention, and the current EU efforts seems to be rather low profile and ineffectual.

To conclude, the two seemingly unrelated issues that the EU faces today can be said to stem from the main underlying problem, which can be summed up as EU’s lack of vision for itself over the question of whether it will become a proper federation that pools its resources, at both economic and political levels, and redistribute for common good of the Union. The Cyprus negotiations seems to be not benefiting from a positive EU role as there is no EU level political consensus on its imminence and also no credible leverage held by the EU institutions that could be used against two of its member states (i.e. Greece and the Greek Cypriots) to motivate them seek a resolution of the conflict, while the Euro’s fate seems to be hanging in the balance since the EU have not yet developed a European Monetary Fund strong enough to show its resolve. In short, the EU needs to get its act together.

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