Cyprus Mail
Guest Columnist Opinion

We must not underestimate the economic benefits of a solution

File photo

By Erol Riza

Over the centuries, Cyprus’ location has meant that it was of strategic importance for powers that wanted to have a major influence in the Levant. British Prime Minister Benjamin Disraeli considered Cyprus as a bulwark to Russian expansion of influence in the region and Winston Churchill used Cyprus military bases to bomb Nazi Germany’s oil depots in Romania which contributed to the World War II defeat of Germany.

Cyprus as a member of the EU (and the Eurozone) is strategically located to enjoy major economic advantages if it can fully exploit its location, the good relations it enjoys with the Middle East and with Russia. Cyprus can, moreover, be an island of peace and prosperity for all its citizens if the Cypriots can grasp the opportunity to find a mutually beneficial solution to the political problem which has plagued the island since its independence.

Cyprus should be seen as the motherland of all its citizens, and as the late Andreas Ziartides of AKEL once said in the 1980s, “economic integration will bring political integration”. This very profound statement from an AKEL politician is not dissimilar to how the EU was established. The European Coal and Steel Community (ECSC) was set up after World War II. France and Germany’s shared interest in the ECSC was also a peace initiative which led to the creation of the European Economic Community, the forerunner of the EU. Can anyone dispute that the period since the last great war on the European continent has been one of peace?

It is with this in mind that ALL Cypriots should not just hear what visiting foreign officials or selected economic interests say about the solution. The average man in the street has to understand the honest truth which has not always been forthcoming from various politicians.

At a meeting on the economics of a solution held in Nicosia several years ago, I met a leading German politician who impressed me very much. I had asked him whether, as a better off West German and with the benefit of hindsight, he thought the huge cost of reunification of West and East Germany had been worth it (and it did cost hundreds of billions of euros). I was told in no uncertain terms “when it comes to the reunification of one’s country there is no cost issue that should count”. This unambiguous response speaks for itself, but in a country like Cyprus where populism has thrived and is suffering an economic crisis, high unemployment and a weak banking system, it is important that the real economic benefits within Cyprus’ grasp be explained without bias.

Cyprus needs to provide economic growth for all the communities on the island. The quest for economic growth must be heralded in Cyprus early on, and it is encouraging to hear that the two leaders have started talking about the economic benefits of the solution. But this is not the whole story. The long term benefits of a solution cannot, and must not, be underestimated. Cyprus, on both sides of the divide, has relied on very few sectors to develop its economy: tourism, real estate development and business services. There have been significant strides from time to time but the negative results have been apparent recently. The lack of healthy investment opportunities led the Greek Cypriot bankers en masse to lend to real estate and created a huge bubble which is taking years to unwind. The banks are not in a position, and will not thanks to regulators, to lend for infrastructure or other projects which Cyprus will need to create jobs. The political uncertainty cannot be a supportive factor for the economy just when foreign direct investment is required. The long term and “patient capital” of EU pension funds and insurance companies, or the Middle East, will not find its way to Cyprus if there is a political risk factor. Any investor committee will place sovereign risk high in their top down assessment. Solving the Cyprus problem in a viable manner will remove this very important investment criterion. But this would be just the beginning of the brighter future since many other positive factors follow on from the political solution.

Cyprus, and its leaders, shouldX aspire to what many economists today call “inclusive growth” post solution. Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section XX of society. The definition of inclusive growth implies direct links between the macroeconomic and microeconomic determinants of the economy and economic growth. In my view this definition of economic growth is what will define the viability of any solution in Cyprus. This concept will require compromise and learning to share wealth in an equitable manner. Cyprus, as an EU member state, is host to an increasing number of non Cypriots who have taken residence on the island and thus inclusive growth should apply to all citizens.

One often hears that the exploitation of the hydrocarbon reserves will accrue to both communities and that this economic prosperity will bring peace. In my humble opinion the energy wealth could be the “oil curse” one has noticed in some countries which did not embrace the opportunities to invest in remodelling their economy to include the advantages that long term economic planning and reform brings.

The internet revolution has brought unimagined wealth to those countries that have provided the right infrastructure and environment, most notably the USA, Israel and the UK. The business model of yesterday is continually being disrupted by the internet so much so that ecommerce is estimated to take an increasing share of the bricks and mortar business; witness online buying in the USA, China and UK and companies like Amazon.

Cyprus, post solution, could see how technology parks with EU support could be developed to enable the young university graduates to work together on services/products that can be successfully marketed in the EU or Turkey since a market as large as Turkey will be open for business for all Cypriots who, in partnership with Turkish Cypriots, can plan or target markets for their technology. Technological innovation comes from work done at universities and a peaceful Cyprus would be a place for advanced education for both its citizens and also visitors from the region including Israel and the Arab world. A boost in economic growth resulting from a better standard of university education, targeting technology and engineering, would be good for all. Education would thus be a major contributor to the island both in revenues from overseas incoming students and money saved from Cypriot outgoing students. Cyprus can become a regional multicultural educational centre and that can only be good news.

Cyprus needs to improve the quality and range of services it offers and be a true regional service centre. It has consistently failed to provide the tourism product since the CTO has shifted policy based on the environment and its board. A reunited Cyprus should see a boost in arrivals and people should not see this as competition between north and south. The global tourist industry is huge and Cyprus can accommodate another 2-3 million visitors if a quality product is offered. Healthy competition is not a bad thing as it improves quality at a cost competitive price. Those who fear that opening the north to direct flights are living in a false sense of reality and comfort. Cyprus as a whole will benefit if travel and free movement is present and the evidence suggests this in post strife countries. The tourism model of Cyprus will drastically change if cruise tourism sees cruise ships docking in either Limassol or Famagusta and including Turkey, Israel and Egypt in their itinerary; anyone who cannot see this is living in self-denial. This is not the only benefit as Cyprus can exploit health and sports tourism if the right infrastructure is developed. Such investment requires significant capital which local banks will not be able to provide. Yet a solution to the Cyprus problem can make such investment projects more attractive to the large pools of funds available in the EU, the Gulf States or Russia.

Cyprus’ location as the first EU member state once a ship leaves the Suez canal has been a major advantage that has been lost thanks to the politics of the island and the lack of vision. The two leaders should have a vision of Cyprus as the services centre of the Mediterranean similar to Singapore which was developed with long term planning by a leader with vision. The Cypriot leaders must have in their mind that Cyprus can be a shipping and logistics hub which even mother vessels/cargo plans from far in Asia and the USA can use for distribution. Global trade relies heavily on the quick gratification of buyers of goods online and Cyprus could be such a distribution centre offering, via agreed Special Economic Zones on the island and tax incentives.

In order to develop the infrastructure for better tourism and logistics the required financing will have to come from abroad, and this will require more changes and reform in Cyprus which will impact the viability of a solution and the prosperity that will follow. Cyprus needs a bottom up change in governance, economic planning, transparency and a sound judicial system. The importance of good governance cannot be overemphasised and those that do not heed the words of the French and German leaders are deaf of choice. The eurozone will move towards a governance where many decisions on fiscal matters will be decided in Brussels. In fact economic mismanagement will be a hard thing going forward, and the recent events in Greece must bring home to all that being a member of the Eurozone brings many benefits but serious responsibilities.

Cyprus will have a cost to bear in the event of a solution which could impact the fiscal position and in my view this can be addressed by the EU. The two leaders discussing the island’s future have a big opportunity to bring the EU into the solution by more than the implementation of the acqui communitaire. The EU must have “skin in the game” as they say in English. The EU must have a stake in the successful and durable solution of the Cyprus problem.

The EU can play its part by providing significant funds/guarantees in three areas: the development of the hydrocarbon reserves via funds from the European Investment Bank/European bank for Reconstruction and Development in the form of project finance so that the Cyprus government does not borrow for this investment; the reconstruction of Famagusta as a model eco city with renewable energy and energy efficiency clearly being implemented, and thirdly, in the issuing of compensation bonds to property owners who chose to have this option. Such bonds should have their principal guaranteed by an EU agency so that these financial obligations can be sold by compensated land owners to banks in Cyprus and beyond. After all, what good would long term bonds be for a 60-70 year old if he cannot monetise them?

The EU must have a stake in Cyprus post solution in more than just words of support and minimal financial assistance. Cyprus would need to justify the cost to EU taxpayers by showing their good faith in making the solution work for the benefit of all its citizens.

It is not a matter of winners or losers but a matter of inclusive growth so that all sections of the population benefit in the form of better governance, better justice, better education, better job prospects, better growth opportunities and a better life in general. The economic benefits/costs should not, as the German politician said, be an obstacle and in the case of Cyprus should also not be underestimated.

 

Erol Riza is a banking and finance consultant and former Vice Chairman of the Interim Board of Bank of Cyprus and former Managing Director of DEPFA Investment Bank Cyprus

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