ECONOMY

Reunification costs set to thwart Cyprus’s early eurozone entry plan

NICOSIA – If anyone needs proof that economics is not an exact science, Cyprus is the perfect case study. Key reunification talks on the ethnically divided island have exposed deep concerns by both sides about the cost and means of stitching back together the diverse economies of the Greek south and Turkish north for European Union entry on May 1. Estimates of reunion costs range from 3.5 billion Cyprus pounds ($7.3 billion) to 16.5 billion, more than double the gross domestic product of both sides combined. At the heart of the debate is a plan to compensate landowners who will give up their property as part of the peace deal, which calls for handovers of territory and shifts in population. The United Nations blueprint for the island proposes that a self-governing property board administer claims and compensate owners with 10- and 15-year bonds, offering a coupon similar or higher than that of comparable government paper. The plan assumes that the scheme will be self-financing, with revenues from property sales used to finance and redeem the bonds, estimated to be worth 10 billion pounds. Zenon Pofaides, a Greek-Cypriot economist, says the reunification bill could be capped at between 3.5 billion and 4.5 billion pounds to be spent on reconstruction and rehousing. Other economists worry that the board will end up saddled with a big deficit that it will pass on to the central government, if valuations – and compensation – for properties in the poorer north are increased to match those in the south. The bulk of real estate affected by the scheme is in the north and concerns are that the north-south wealth gap means few Turkish Cypriots will be able to afford it. No matter how big the bill will be, economists agree on one thing; should reunification take place, Cyprus can forget its hope of adopting the euro by 2007. «The targets which need to be met for joining the eurozone have to be postponed, for two to three years perhaps,» Pofaides said. Last year Cyprus, without the northern Turkish-Cypriot part, had a budget deficit estimated at 6 percent of GDP, double the rate allowed for eurozone entrants. Alexis Galanos, head of a panel of economic advisers to Greek-Cypriot President Tassos Papadopoulos, says just servicing the costs of property bonds will swell the shortfall further. «The cost of servicing the debt will exceed 400 million pounds annually. That is an additional three percentage points on the fiscal deficit,» he said. «How can we get into the eurozone in the next two years?» Greek Cypriots also worry that the bond issue could add to inflationary pressures and possibly hurt the pound after years of stability. Eurozone ambitions aside, it is also uncertain how the merging of two such different economies will play out. In the three decades since Turkey invaded the north, the south has developed into a thriving tourist destination that has booked its place in the enlarged EU. In the north, incomes are about a third of those in the south.