Cyprus Crisis: An Island of Reinvention

By Elizabeth Pond

Cyprus has reinvented itself a dozen times—six times before the 12th-century Crusaders arrived, three times before the 16th-century Ottoman warriors defeated the Venetians, and twice since Britain gave up its bridge to eastern empire in 1960. There's no reason why Cyprus can't pull off the same trick again.

Sure, last week the finance minister had to resign over dubious investment decisions he made as a private banker. This week officials announced that the Cypriots and their banks must ante up an extra €6 billion against their own debts to qualify for the €10 billion bailout their euro zone partners have just promised to save the countryfrom bankruptcy. Cyprus will be selling most of its gold reserves to do so—the first distressed country to resort to this since the Asian financial crisis 15 years ago. And Cyprus's bubble economy, built on discreet banks that for decades asked no awkward questions about the provenance or tax status of deposits before paying out their high returns, has collapsed.

Yet that shouldn't stymie the reputed birthplace of Aphrodite; Cypriots are used to starting over.

In modern times, the Mediterranean island's first reinvention after independence came in the mid-70s, after four years of intercommunal violence, a Greek coup against the initial bi-ethnic government, Turkish military counterinvasion, and partition into the northern third for the minority Turks and the southern two-thirds for the majority Greeks.

At the time the Cypriot economy was one of the poorest in Europe, with nominal per capita incomes of $1,451. To get rich, the Republic of Cyprus in the Greek south turned to tourism, shipping, and, above all, banks. Its offer of a tax and (as was widely reported) laundering haven proved to have a Midas touch. Foreign money poured in as the 1970s oil crisis and then the Lebanese civil war hit the Middle East. It continued to pour in and help Serbian autocrat Slobodan Milosevic evade international sanctions during the 1990s wars of the Yugoslav succession and to give Russia's wild west capitalist oligarchs a safe hideaway for their wealth.

By 2004 Cyprus was admitted to the European Union after Greece, a European Community member since 1981, threatened to veto the accession of Central European and Baltic states if Athens' protégé was not given membership simultaneously. With the island still divided, Cyprus's entry into the club violated the most fundamental EU rule of all—that no candidate could join until it had resolved territorial disputes with neighbors. The experience quickly soured many of the original EU members on further enlargement, especially since the Greek Cypriots—who had sounded conciliatory during the negotiations for EU accession—rejected by a 76 percent majority the United Nations compromise plan to reunite Cyprus once their EU membership was assured. In the same referendum the Cypriot Turks voted 65 percent in favor of the compromise.

By then Greece had already entered the European Monetary Union, in 2001, on the basis of artificially enhanced economic statistics. By 2008 Cyprus too—now with a GDP per capita that in 33 years had soared in nominal terms more than 20 times to reach northern European levels of $31,693—was allowed to join the common euro club, even though its bank deposits had swelled to eight times its GDP in what various commentators would soon be calling a huge Ponzi scheme. When the Socialists unseated the conservative government in snap Greek elections in October 2009, heavily indebted Greece admitted the previous government's original falsification and triggered the euro zone crisis that continues today.

By last month, Cyprus joined Greece, Ireland, Portugal, and Spain (although Madrid's handout was labeled something else) in the line-up for euro zone bailouts. Dutch finance minister and Eurogroup President Jeroen Dijsselbloem made it clear that the quid pro quo of "bail-ins," or a mandatory "wealth tax" on rich depositors in Cypriot banks, would become standard in some degree in future euro zone bailouts, in order to reduce moral hazard. Other global tax havens heeded the warning, which was reinforced by an advocacy group's leak this month of millions of bank records about thousands of investors. Luxembourg and Austria, the only two EU countries that had hitherto rejected an automatic intra-EU exchange of information about bank deposits and tax cheats, announced they would ease their secrecy rules.

In the meltdown of Cypriot banks and their supporting services, angry Cypriots whose jobs suddenly vanished blamed "Nazis" like German Chancellor Angela Merkel for their misfortune. On the other side, German taxpayers, who have to pay for the Cypriot and earlier bailouts, raised their eyebrows on learning this week from European Central Bank statisticians that the median net wealth is €267,000 per household in Cyprus, but only €51,000 in Germany.

So how might Cyprus reinvent itself this time around?

Well, for a start, it might begin cooperating with its nearest neighbor—Cyprus is 50 miles south of Turkey, but 500 miles east of Greece—to extract natural gas from recently discovered reserves in the waters between (Turkish) Cyprus and Turkey and in the Aphrodite gasfield south of (Greek) Cyprus. The gas could be transported by short pipelines to Turkey and transported from there to Israel, Egypt, and Greece. The Turkish Republic of North Cyprus, whose GDP per capita is only half that of Greek Cyprus but whose economy is growing even as that of the Republic of Cyprus is contracting, could provide consumer impulse to growth on the whole island. Once commercial collaboration began, the Turkish north and Greek south might even revisit the UN's 2004 compromise plan for reunification.

Gas exploration is still at an early stage, and any projects begun now would not bring in significant revenue until 2018 or 2020.

But if this points the way to a new transformation, what is a wait of a mere five or 10 years for an island that is 12,000 years old?



Elizabeth Pond is a Berlin-based journalist and the author of The Rebirth of Europe.

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