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    What’s worth €17bn?

    By Mandeep Bhandal, on 20 March 2013

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    The Institute for Security and Resilience Studies (ISRS) provides a Net Assessment Bulletin (NAB) of the latest economic crises erupting through Cyprus.

    What’s worth €17bn?

    The latest cascade of economic crises erupting through Cyprus provides even more evidence – as if that were needed – of a severe lack of strategic grip from EU elites (be they technocratic officials, rent seeking bankers or out of touch politicians). Nevertheless, the Cyprus crises need not be wasted. A grand strategic move would be to make re-unifying Cyprus the best outcome for Cypriots, EU citizens and all our allies. Indeed, it would be worth the investment of €17Bn and certainly a better outcome than playing the financial folly blame game, when all parties are culpable in one way or another. The virtue of such a strategic move could be its honest transparency not just the important strategic advantages to be gained on several fronts.

    It is worth remembering that in 2004 the Greeks threatened to veto EU expansion if the accession of Cyprus was not included as the tenth new EU member that year. The veto threat left some EU partners and allies feeling blackmailed. It need not have done so, if the Annan Plan to resolve the partition of Cyprus had won the backing of both the north and the south of the island in the referendum that same year. Inasmuch as Greek Cypriots can claim secret diplomacy undermined their confidence in the re-unification offer, the referendum result sowed discredit that has only been exacerbated by Greek and Greek Cypriot Eurozone performances since. The whole of Cyprus being an EU member but not a member of NATO adds significantly to the strategic implications of how the current crises are handled.

    Today, in an effort to prevent any run on banks in Cyprus, Cypriots have woken up to another day where the banks are closed to them. The manoeuvres by the Cypriot President, Nicos Anastasiades over the last few days may have been more of an attempt to protect its off-shore financial centre business than resolve its public debt problem. Sucking more Russian money into Cyprus’ financial and energy sectors may have parochial and Byzantine appeal but ill serves Cypriots as EU citizens and the alliances Cypriots rely on for their security. Nevertheless, the Cypriot parliament was given easy populist cover for unanimously rejecting the proposal of the technocratic Troika (comprising the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF)). Predictable public outrage at the one-off 6.75% levy on savings of less than €100,000 will result in more than crude gestures and rhetoric involving German flags.

    Politics and economics are inextricably linked. They are transnational rather than just national or international. This couples the fortunes of the few with the many in ways that are not healthy by default. Cyprus allowed its banking sector to balloon. Even if that ballooning did not involve all Cypriot banks or the informed consent of all citizens, it was their government that created a permissive environment in which too few questioned the credibility of their growing prosperity. We are left once again in a situation where the self-righteous can chant “moral hazard”, particularly if it seems that in easing the plight of Cypriots, some non-EU citizens and their illicit finances will be protected and continue their corrupting work. Yet the precedent of bailing-in the savings of insured depositors is politically toxic and contagious. It is quite at odds with how the EU obliged Eire to honour not just the letter of depositor insurance but the spirit too. The Irish have endured with good grace and done their bit to prevent contagion since 2008.

    The Troika’s decision on a ‘haircut’ reaching ordinary savers demonstrates just how out of touch the political elite and technocratic officials are. Claiming Cyprus is a “special case” and other periphery countries need not fear the same fate is naïve. This policy initiative could reveal once more the fragility of the Eurozone, as depositors elsewhere in the periphery consider moving their savings into safe havens, including old-time notes under the mattress or more advanced crypto-currency bitcoins. The Troika’s political maladroitness might have been thought helpful to Merkel’s re-election prospects but lurid headlines about Russian criminals getting their hands into German taxpayers’ pockets allows populist tactics to obscure strategic wins. Putin does not shy from populism, as his rumoured statement to the Cypriot President concerning German flags underscores. However, for now any populist outburst from Putin will have strategic intent.

    Cyprus as a convenient off-shore financial centre (OFC) has its advantages but Russia will be more interested in their growing energy security racket and disadvantaging NATO. Russia is seeking to shape Europe on its Byzantine terms. These continue to diverge from the shared interests and values of all EU and NATO members. Whether Putin’s strategy advantages Russians as a nation rather than their rentier state elite is doubtful. Conversely, Angela Merkel defaulting into reparation mode for a September election could mark a failure of leadership born more of bad populist tactics than strategy. This approach to Greek Cypriots is only compounded by politicians being too coy to challenge what many Germans think of the Turks next door. Turks are far more than freeloading one-time gastarbeiters; they can amplify their allies otherwise declining power, not least in a regional neighbourhood that still matters. The outlook from Moscow and Berlin does not advantage Cyprus, the EU or NATO.

    Instead of leaving strategy to Putin and tactics to German populist politics, the EU could do something very worthwhile for €17Bn – re-unify Cyprus! Doing so could turn Turkish garrisons into a few more NATO bases and enable real power to be projected with energy and enterprise by the EU for the good of the whole region. Bad mouthing Russians, Greeks and Turks simultaneously is crass. A United Republic of Cyprus would create a hub for EU and NATO partners. From there options open up across the Levant, Caspian, and Caucasus that offer rewarding growth for all rather than more corruption, decline and conflict.