By Alexander Apostolides on September 22, 2009

The economic aspects of a solution in Cyprus

Yesterday i attended a series of talks on the economic aspects of the Cyprus problem. The speakers were Mr. Basilliou, the chief G/C negotiator on European maters, Mr. Sarris, the chief G/C negotiator on Economic maters and A person form the European Commission (finance section) whom i unfortunately do not remember his name.
I left highly troubled due to three things – i do stress that below are my own conclusions of the speeches, and not the positions of the speakers themselves.
1) The EU has a Schizophrenic approach to the solution. One the one hand it does not want to get involved at all, despite the fact that a solution needs to fit (or even alter) the laws and regulations of the European Union. So it is left on the G/C side to argue that there can not be an prevention of people and capital crossing the borders of the constituent republics of a future federal Cyprus, despite the fact it is actually the EU than demands such a rule. Most worrying is the fact that the EU is thinking that Cyprus could finance rebuilding and a solution by just breaking the growth and stability pact for a maximum of 4 years. That is sheer lunacy – the construction of roads and a common electricity network, let alone making Famagusta fit for human habitation, will lead to prolonged and sustained budget deficits that could not and should not be restricted.
2) The Turkish Cypriot negotiation seems to suffer from the fact that the T/C have only the faintest idea on how the EU works. The lack of entry negotiations by the T/C mean that some demands are quite simply not realistic within an EU framework. Thus it is a fact that the EU will not accept constituent states to make any representation directly to the EU – it opens up an very ugly precedent. Thus the federal state needs to work correctly as the EU will only interloculate with federal instruments. Like wise arguing for two financial regulatory authorities, or for separate rules for Turkish institutions, goes contrary to the basic tenants of the EU and it is futile and destructive to argue for them since they will not be accepted by the EU.
3) In game theory terms, the negotiations are difficult because the actors have completely different aims: The EU, Turkey and G/C + T/C find it difficult to find common ground since their aims are parallel to each other – they simply do not connect.
I expect a long and frustrating negotiation process, that can only be aided with the EU actually becoming an actor and explaining to all what can and cannot be accepted.

3 comments:

  1. Alexander,
    Pity we didn’t meet 
    The European guy was Johan Barras, a very flat guy from Belgium.
    Well, they didn’t really talk about economics, and that’s what troubled me.

    Mr Vasiliou’s assertion that there is going to be no money problem, because “we can always use printing machines “to find more money, was highly irresponsible.

    I think though that all the speakers were quite certain that certain TC demands are totally out of the question in the EU context. I also think that the TCs themselves know that.

    Sure the budget deficits should be allowed for as long as it is necessary for the “new” country to consolidate. However, if there is no hint of discipline things could turn permanently ugly. We could start with a 4 or 5 year of allowed flexibility, and then reconsider. There must be check points in the process.

    The EU will never become a serious player in the process of reaching a solution, however it will have a major role in putting it into practice.

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  2. Alex
    I do agree that big and sustained budget deficits are both dangerous for the economic growth of one country but also for a government's credibility. People unfortunately forget or they choose to forget and that is the most dangerous part of the whole process. The most obvious example is the one by Mr Vasiliou, as been mentioned by strovoliotis, which is due to the fact that Cyprus has never experienced hyperinflation, recently at least. Also the well known saying in Cyprus, ‘ by owing a piece of land you never lose the value of your money’ something that recently with the real estate crisis has started to be challenged.
    As for game theory, this concept prescribes a certain way to arise to equilibrium. It is not necessary for an alignment of interests. The most famous case is the Nash equilibrium which only requires that both parts take actions that are best for their own. In the case of the negotiations, the problem is high dimensional and dynamic, but I also think that the most difficult part is not of how to agree in which way the economy will work but for the distribution of power. So the political aspect, institutional issues, has a spillover effect to the economic and not the other way around.

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  3. Dear Strovolis we really must meet. At least email me at alexapostolides@gmail.com in order to send you the invite to post to this blog - i really like you posts, even if i do not comment so frequently to them.

    John Doe:
    I don't agree with inflationary hypothesis for two reasons:
    1) we are now in the Euro- since we are in the eurozone excessive budget deficit will not bring inflation of a permanent nature since the impact to the eurozone will be minimal. There will be deamand led inflation that should die down when the demand for reconstruction slowly dwindles.
    2) The massive budget deficits predicted will be for the best possible reason - investment. With out the investment to make the areas returned to the G/C viable the whole solution is in danger and the growth potential of Cyprus will be impaired - reducing the benefits of a solution.

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