Day After III

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Download: Day After III - The Cyprus Peace Dividend for Turkey and Greece

This study is the third in the series of Day After reports prepared by the all-female team that has come to be known as The Three Ladies. In our first report, we analyzed the commercial opportunities that could arise from the reunification of Cyprus and quantified the peace dividend for the key sectors that would benefit. In our Day After II report, having analyzed the investment and reconstruction needs in the first few years, we went one step further by extending our analysis to the whole economy. We found that a solution would generate EUR 12,000 per year per family on the island, create 33,000 new jobs and raise the real GDP growth rate by 3 percentage points per year on average for at least the first five years.

In this Day After III report, we look beyond Cyprus to the region, analyzing the peace dividend that awaits Turkey after a solution that unites the island, while we also preview the benefits for Greece. We find that Turkey will not only make significant savings from property litigation and military expenditure but also stands to make huge financial gains from the transformation of the Turkey-Cyprus-Greece region into one of peace and stability. This, in turn, will have positive spillover effects for tourism, transport, financial and business services and energy.

On the savings side, using the precedent of property cases at the European Court of Human Rights as a guide, we find that Turkeyʼs maximum savings from property litigation could be as high as EUR 89 billion, or 20% of GDP, while based on cases at the Turkish Cypriot Property Commission, its minimum saving would be EUR 24 billion, or 5.4% of GDP. Spread over ten years, this translates into a maximum savings of just under EUR 9 billion per year and a minimum savings of EUR 2.4 billion per year. Largely as a by-product of the Cyprus problem and northern Cyprusʼs lack of integration with international markets, Turkey spends hundreds of millions each year subsidizing the Turkish Cypriot budget. Once the Turkish Cypriot economy is opened to the world, these subsidies should decline rapidly, which we estimate would save Turkey EUR 480 million per year.

Savings on military expenditure in Cyprus are estimated at just over EUR 480 million per year, while savings on military expenditure in the Aegean, which can be expected as a positive by-product of a solution to the Cyprus problem, amount to an even higher EUR 1.8 billion per year, bringing total military savings to EUR 2.2 billion.

Regarding gains in the tourism sector, a solution would open up many new opportunities for regional tourism that are currently not available, as well as additional bilateral tourism with Cyprus and Greece. These two together, we estimate, would generate additional travel revenue flows of EUR 1.6 billion per year on average. Turkeyʼs transport sector has stagnated since 2005, which may be connected to the fact that the sector is closed to the EUʼs third largest shipping fleet. We estimate that opening ports to the southern part of Cyprus would yield a minimum EUR 1 billion per year or a maximum EUR 1.3 billion per year. Adding EUR 412 million from gas transit brings the total revenue to EUR 1.7 billion per year.

Financial intermediation is the fourth largest sector of the Turkish economy, accounting for 10.6% of GDP in real terms; yet exports of financial and business services are currently minimal. With a solution that leads to the application of the EU acquis communautaire to the whole of Cyprus, Turkish banks and professional services firms will be in a position to take advantage of Cyprusʼs low tax regime to significantly broaden their presence in the European market by using Cyprus as a base. We estimate that this would generate EUR 7 billion in revenue from exports of financial and business services. Exports of goods, boosted by the opening of the transport sector to the third largest shipping fleet in the EU, would generate an additional EUR 2 billion per year.

The largest opportunity, however, comes from opening up Turkeyʼs potential as an energy hub. As a direct by-product of the Cyprus problem, Turkey has been unable to open the energy chapter in its accession negotiations with the EU and this kind of uncertainty deters investors. On the other hand, a settlement of the Cyprus problem that reunites the island and brings peace and stability to the Turkey-Cyprus-Greece region would vastly increase foreign interest in the energy sector. We estimate that this, together with other opportunities created by a settlement, would lead to foreign direct investment (FDI) rising to EUR 33 billion per year from a recent peak of EUR 16.1 billion, according to Eurostat data in 2007. While this figure may seem high at first sight, it should be remembered that Turkeyʼs FDI rose tenfold in 2004-06 and it is currently a tiny proportion of the countryʼs GDP compared with the respective figure for the southern part of Cyprus.

According to our estimates, therefore, Turkey stands to gain savings of EUR 5.1 billion per year and export revenue of EUR 12.3 billion per year. Adding this all together yields a peace dividend of EUR 17.4 billion each year or 3.5% of GDP. In the context of a budget deficit that reached 5.5% of GDP in 2009, or of a current-account deficit which could reach 4.5% in 2010, this represents a significant peace dividend that awaits Turkey. Moreover, this figure does not include the estimated EUR 33 billion in gains from foreign direct investment. Greece also stands to gain from a second phase of normalization with Turkey (subsequent to the first phase that began in 1999). Our preview of the economic benefits to Greece has identified savings of EUR 2.3 billion per year in military expenditure, as well as EUR 50 million per year of income from gas transit, EUR 110 million of additional tourism revenue and EUR 19.8 billion per year in FDI.

Many analyses of a solutionʼs impact on the economy focus narrowly on the opportunities for intra-island trade. In the three Day After reports, we have sought to remind the public that the benefits will be far wider in scope. Not only would reunification create significant new opportunities for Cyprus to do business with Turkey, but, as this report will attempt to demonstrate, tremendous benefits also await Turkey and Greece if a peaceful resolution to this decades-old conflict can be found. Turning our predictions into reality is in the hands of the political leaders.