IF ANYONE needs proof that economics is not an exact science, Cyprus is the perfect case study.
Reunification talks on the 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 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.
Zenon Pofaides, a Greek Cypriot economist, says the reunification bill could be capped at between £3.5 billion and £4.5 billion to be spent on reconstruction and re-housing.
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 euro zone 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 six per cent 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 the servicing costs of property bonds will swell the shortfall further.
“The cost of servicing the debt will exceed £400 million annually. That is an additional three percentage points on the fiscal deficit,” he said.
“How can we get into the euro zone 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.
Euro zone ambitions aside, it is also uncertain how the merging of two so different economies will play out.
In the three decades since the Turkish invasion, the south has developed into a thriving tourist destination that has booked its place in the enlarged EU.
The north, hobbled by an international embargo, has not progressed much from the agricultural backwater Cyprus was before it was torn up in 1974.
Incomes there are about the third of those in the south and a lack of jobs has forced many young professionals to leave.
Economists say Turkish Cypriots stand to gain from a boost in tourism-directed investment if there is a settlement, coaxing growth by up to 15 per cent per year.
Greek Cypriots expect less of a push in the key tourism sector but say both sides stand to save by slashing a hefty defence bill and rationalising telecoms, water management and power networks.
In the north, concerns centre on how a monetary policy will cope with a two-speed economy and whether the planned adoption of the Cyprus pound as the legal tender for the united island will not make Turkish Cypriots even poorer.
“If we transfer our assets to Cyprus pounds it diminishes their value,” said Fatma Guven-Lisaniler, Assistant Professor of Economics at the Turkish Cypriot East Mediterranean University.
“For transfer purposes maybe the value of the Cyprus pound against the lira should be depreciated,” she told Reuters.
With a donor’s conference for Cyprus set for April 15, and both the EU and the United States promising to be “generous” the key challenge is to have a clear message on what the economy needs and win firm commitments, she said.
“Instead of saying “we are paying more, or they are paying more” we need to work together and produce a common report to get the foreigners to show us the money,” Guven-Lisaniler said.
