A Challenging EU Presidency: Crisis-Hit Cyprus Takes Europe's Helm

By Klaus Hillenbrand

The island republic of Cyprus has taken over the EU's rotating presidency at a particularly inauspicious moment. Not only does it have an ongoing dispute with Turkey, but the euro-zone member has just requested a bailout. But the small country is determined to show that it can perform its EU duties with aplomb.

Photo Gallery: Cyprus's Challenging EU Presidency Photos
AFP

A steel-and-glass palace stands at the gateway to the Cypriot capital Nicosia. The headquarters of Laiki Trapeza, or People's Bank, is directly next to the expressway. It's a futuristic building, but bankruptcy lurks behind the façade.

Laiki Bank, which made unwise investments in Greece, urgently needs €1.8 billion ($2.25 billion). Because the bank was unable to raise the money itself, despite weeks of efforts, Cyprus has had to ask for help from its international partners. Last week, the country applied for aid from the EU bailout fund and the International Monetary Fund (IMF).

The call for help could hardly come at a worse moment. As of July 1, the Republic of Cyprus has assumed the rotating European Council presidency for six months.

Laiki Bank isn't alone. Other Cypriot lenders are also potentially in trouble. They lent about €25 billion to Greek borrowers, and now it is unclear how much of that money they will ever recover. The government also needs new loans, meaning that Cyprus's request for aid could total up to €10 billion -- and that in a country with about 840,000 people, the third-smallest economy in the euro zone, with a gross domestic product of less than €18 billion. All three major rating agencies have downgraded Cyprus's debt to junk status.

This is a new experience for the Greek Cypriots, who had enjoyed consistently growing affluence for decades. Unemployment was almost nonexistent, and unlike Greece, the bureaucracy which controlled the island state's affairs was efficient, even if it was bloated. This is now over. Cyprus is in a deep recession. Unemployment is around 10 percent, and among young people it's climbed to almost 30 percent. "For rent" signs are taped to more and more storefronts in downtown Nicosia.

Under an Unfavorable Star

Unlike the Laiki headquarters, the presidential palace in the Cypriot capital is a modest villa from British colonial days. It's the residence of President Demetris Christofias, the only communist head of government in the EU. His Progressive Party of Working People (AKEL) traditionally captures the votes of a third of all Greek Cypriots in parliamentary elections. AKEL never officially abandoned Moscow-style socialism, but in practice the party more closely resembles traditional European social democratic parties. Its central goals are to increase prosperity among workers and resolve the conflict with Turkish Cypriots. In both cases, the prospects are not good.

Cyprus has been divided since 1974. The demarcation line runs from east to west, straight through Nicosia's old town and the entire island. Empty oil drums and sand bags, topped with rusty barbed wire, form the "green line," interrupted by a small number of checkpoints which allow people to cross into the other part of the island. Thirty-eight years ago, the Turkish army captured the northern part of the island after the military government in Athens had been overthrown in a coup. Since then, the Turkish Cypriots have been living in the Turkish Republic of Northern Cyprus, a country that is only recognized by Turkey. Ankara has about 40,000 troops stationed in the territory.

Although border incidents are rare, real peace has eluded the island to this day. After years of fruitless talks, the negotiations are now on ice. The fact that Turkey does not recognize the Republic of Cyprus as the only legitimate state on the island has consequences. Although Cyprus as a whole formally joined the EU in 2004, the implementation of European rules and laws ends at the demarcation line. The Greek Cypriots share some of the blame. In 2004, a majority rejected a United Nations reunification plan in a referendum, while the Turkish Cypriots approved the plan.

Nicosia's cold war with Turkey means that the country will face diplomatic as well as financial challenges during its turn at the EU's helm. Ankara plans to boycott Cyprus's European Council presidency. The Turks will stay away from any meetings where Greek Cypriots are also at the table. "They don't even want to talk to us," Cypriot Foreign Minister Erato Kozakou-Marcoullis told the news agency AFP. The government in Nicosia has, however, promised not to leverage the EU presidency to pursue its own interests. Andreas Mavroyiannis, Cyprus's deputy minister for Europe, insists that the country will not mix the Cyprus conflict with the country's EU presidency.

Proving Itself to the EU

Mavroyiannis believes that the small island republic has prepared itself well for its European mission. Cyprus has increased the staff at its office in Brussels from 80 to 230, and the Cypriots want to show that they can successfully pull off the dozens of conferences and negotiations that await them in the coming months. "What's important for Cyprus to prove is not that it can organize an event -- what it has to prove is that Cyprus can do the job as well as any other European (country)," Costas Yennaris, spokesman for Cyprus's EU presidency, told AFP.

But the country's appeal to the euro bailout fund doesn't exactly enhance its credibility. And the billions from Brussels might not be the only loan. President Christofias is also looking for fresh funds in Moscow and Beijing. The Cypriot leader obtained his doctorate at the Moscow School of Social and Economic Sciences, and he still has many friends in the Russian capital today. The island itself is a popular base for wealthy Russians and Ukrainians, who use it to do business at home, thanks to favorable double taxation treaties.

Other foreigners are also attracted to the island, thanks to a corporate tax rate of only 10 percent. In 2011, Cyprus borrowed €2.5 billion from Moscow, at an interest rate of only 4.5 percent. At the time, it was already having trouble getting funding in the international capital market.

Until now, Christofias had nothing good to say about the so-called troika of the EU, the European Central Bank (ECB) and the International Monetary Fund (IMF), which he has dubbed a "colonial force." Now the government is waiting to see what conditions the troika is going to impose. At about 72 percent of gross domestic product, Cyprus's debt ratio is lower than that of, say, Germany. But its budget deficit, which was 6.3 percent in 2011, is still much too high. Christofias is worried that the EU will demand cuts precisely among those people who are some of his most important supporters: public sector workers.

There are around 70,000 people employed in the public sector in Cyprus. Civil servants are already being forced to do without having their salaries automatically adjusted for inflation, which was the case in the past. Cyprus has increased payments into pension funds and has raised the rate of value-added tax from 15 to 17 percent. But the measures are apparently not enough. Many Greek Cypriots currently fear the conditions which the Europeans will impose in return for aid.

The 65-year-old Christofias will step down as president next year after five years in office, shortly after the end of the country's EU presidency. The reason, he says, is that he hasn't achieved reunification with the north. In Nicosia, some commentators fear that he will leave his successor to sort out the country's major financial problems.

Translated from the German by Christopher Sultan

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1. Omen
tnt_ynot 07/03/2012
This constellation is an omen and symbolic for the future of Europe. A small country in debt and crisis with its neighbors is steering the ship. Anthony http://euro-meltdown.blogspot.com
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