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The outcome of the simultaneous 2004 referenda on the Annan Plan – overwhelming rejection in the South and support in the North – reflected the contrast between the moods of the Greek Cypriot and Turkish Cypriot communities. Citizens of the Republic of Cyprus could expect the political and economic benefits of EU accession (which occurred immediately following the referendum) to allow them to negotiate a better deal in the future. Many of the island's Turkish residents, on the other hand, regarded the Annan proposal as their last chance at ending the three-decade long isolation on relatively favourable terms. For Turkey and Turkish Cypriots, an EU member Republic of Cyprus would represent a more difficult entity to negotiate with.
The situation on the island has dramatically changed in the past nine years. Today, with its economy crippled and international reputation damaged, the Republic of Cyprus faces a crisis that some of its citizens regard as "worse than 1974". The Turkish-controlled North has certainly not become the Switzerland of the Mediterranean, but its economic outlook has significantly improved in the post-referendum period: the GDP per capita nearly tripled, unemployment declined, and currency stabilized.
The biggest factor behind the transformation of the North has been the improvement in Turkey's economic fortunes. The tourism industry of the North has doubled in size, fuelled by a rise in the number of tourists from Turkey. There is a rapidly expanding higher education system that caters to overseas students from Turkey, the Middle East and former Soviet states. Eight university campuses set up mostly by Turkish investment now host more than 30,000 international students. Although the economy has relatively weakened in the last couple of years as a result of an indirect exposure to the downturn in the European markets, things look considerably better than they did ten years ago.
Turkey's economic performance has also meant that the country has public and private funds to invest in large infrastructure projects on the island, which is paving the way for further economic growth. The Ercan Airport expansion project is a notable example. A Turkish company will soon build a new terminal and an additional runway in the Nicosia airport located only miles from the UN enforced "green line". In the next four years, the airport is expected to quadruple its annual capacity to around six million passengers.
Another major project that is expected to improve life in the Turkish-controlled part is the ongoing construction of water pipelines through the Mediterranean Sea. In a year, the project (estimated to cost close to 1 billion USD) will begin to send water from Turkey's south to North Cyprus, where a new storage and distribution net will end the fresh water shortage. Solving the historical water problem will not only breathe new life into agriculture, but is also expected to improve other areas of the economy.
On a more speculative note, Turkish Cypriot policymakers expect these tangible improvements to convince some of the foreigners living and doing business in Cyprus to relocate to the North. For instance, in an interview with a local daily, Finance Minister Ersin Tatar voiced his expectation that a considerable number of retired Britons residing in Cyprus would consider settling in the North. A sudden inflow of foreign investment is unlikely due to international embargoes on the Turkish side, but even a relatively modest movement of cash could boost the Turkish Cypriot economy.
How will these changes reflect on the stalled peace process?
There is, of course, the pessimistic scenario of the economic crisis in the Republic of Cyprus fuelling nationalism among the Greek Cypriots and arrogance among Turkish politicians. Leaving such cynicism aside, let us focus on how the recent developments could be conducive to peace efforts.
Despite being in a significantly better position than in the run-up to the Annan talks, the Turkish side is still likely to support peace on terms similar to those of the Annan Plan. While the North can continue to grow economically despite its isolation, the prospect of ending the legal indeterminacy and of international recognition within a unified (but federal) Cyprus, for the Turkish Cypriots, remain incentives that could trump any economic calculation.
The Turkish side's readiness also has to do with Turkey's policy priorities – not just the mood on the island. By supporting the Annan plan in 2004, Turkey showed that it wants the decades-long problem solved in order to focus on economic growth and to rescue its EU membership bid. Besides being a strategic setback in terms of international relations, issues such as the Cypriot and Kurdish ones have destabilizing effects on Turkey's domestic politics and economy. Firstly, they prevent a more thorough and principled de-militarization of Turkish politics. Secondly, prolonging such conflicts discourages foreign companies from augmenting their investment in Turkey.
One also has to pay attention to Turkey's changing sociopolitical mood – most importantly, the weakening of nationalist rhetoric – which seems to result from a more permanent ideological shift such as an increasing dissatisfaction with statism, rather than a merely cyclical fluctuation in public mood. Recent opinion polls indicate that around two-thirds of the population of Turkey support the government's peace talks with Kurdish rebels, which in the old days of widespread belief in the sanctity of the Turkish state would have been impossible.
Turning our focus to the Republic of Cyprus, it is clear that today integration makes more economic sense than it did in 2004, when the wealth disparity between the two parts of the island was more than double what it is now. Reunification under a federal structure is easier to carry out when there is a narrower economic gap between the two polities, and consequently less need for wealth-sharing in the short run. Also, reunification could come with economic benefits of its own. Becoming conflict-free would send positive signals to international investors, and eventually lead to an increase in foreign direct investment.
Cooperation with Turkey – the country with the most positive economic outlook in the region – could offer Cyprus substantial economic gains in its own right. For instance, partnering with Turkey on building a gas pipeline between the island and Turkey's Mediterranean coast could slash the costs of gas transportation project by billions of dollars, and make international financing of the project much easier. Not long ago, Turkey played an important role with the United States, the United Kingdom and others in the completion of one of the most expensive pipeline projects in Europe's history – Baku-Tbilisi-Ceyhan that carries oil from the Caspian to the West.
Another reason for the citizens of the Republic of Cyprus to be keener on peace than they were nine years ago is that the conventional strategy of isolating the North fails to create more favourable conditions for Cyprus. The continuation of international embargoes could slow the economic growth of the North, but as the record of the past nine years clearly show is not likely to prevent it. Turkey provides a strong enough market for the Northern Cypriot economy to catch up with the South. The other potential markets such as Iran, Azerbaijan and Arab states are big enough to provide growth for key service sectors such as tourism and education.
Who makes the first move?
Normally, one would expect the European Union to resuscitate the peace process that has all but collapsed since the aftermath of the Annan referendum. However, with the German Chancellor unenthusiastic about Turkey's EU bid, the British Prime Minister not keen on the Union itself, and the French President having a consuming economic agenda at home, an EU led breakthrough looks less likely.
Having become politically and economically the more stable party of the conflict, Turkey can have the political maturity to take some positive steps to improve relations with Cyprus. The story of Cyprus is a telling example of how political and economic advantages come and go, and one's geopolitical fortunes can change in a matter of few years. So there could not be a better time for Turkish policymakers to choose cooperation over hubris.
As a sign of good will and commitment to the idea of European cooperation, Turkey could start by opening up its ports to Cypriot ships. Given that the newly elected President of Cyprus, Nicos Anastasiades, is a politician who had the courage and foresight to back the Annan Plan despite overwhelming opposition from the rest of the political spectrum, Turkey's initiative should be enough to jumpstart the peace process.
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