As expected, the government of Cyprus rejected the bank tax on deposits and now the government will return to the negotiating table with the EU.

Christine Lagarde, president of the IMF, indicated she would be open to exempting the first €100,000 in deposits as long as that revenue is made up elsewhere, but it’s not clear whether the populace would countenance even that. And it is hard to see how Cyprus could replace the revenue that would be lost from exempting smaller deposits from the tax, at least not in a way that would be the least bit politically palatable.

But all is not lost. The EU should recognize the political constraints facing the Cypriot government, and acquiesce to the higher exemption cap in exchange for Cyprus agreeing to return to negotiations to end the partition of the island – and condition further aid to a resolution of the dispute. Doing so would provide a badly needed economic impetus to the island, allow for Greece and Turkey to withdraw the tens of thousands of troops on the island (and save them money), and remove a major barrier to a Turkish ascension into the EU.

A bit of history is in order: the majority of the Island’s residents have always been Greek, with a significant minority of Turks residing there as well. The two managed to coexist in peace for some time, but tensions cropped up in the 1960s after England abandoned its former colony, and the two populations began to hew to a more nationalistic orientation. Violent clashes began to occur, and in 1974 the Turkish government invaded the island, which they said was a necessary intervention to protect their fellow Turks. The island was subsequently partitioned, with the Turks living in the northern section of the island and the Greeks living in the southern part. Today there are about 800,000 people living in the country of Cyprus, with another 400,000 living in the northern part, referred to as the Turkish Republic of Northern Cyprus by its citizens. A sizeable number of those residents are citizens of Turkey who have moved there since the partition.

There is a buffer zone on the island maintained by roughly 1000 UN troops that costs roughly $60 million a year to maintain. In addition, the Turkish government maintains a sizeable garrison (estimated by some to be as many as 40,000 troops), along with a sizeable contingent of Greek troops as well.

Before Cyprus was admitted into the EU in 2003 the Turkish government-the same as today-announced that it was prepared to agree to any terms in order to resolve the issue. Cyprus, however, rejected reunification in a referendum that its leadership negotiated, and then exhorted its citizenry to reject. Since that time there have been occasional meetings between the two parties, many of which were brokered by the United Nations. Nothing, so far, has been resolved.

For Turkey the partition represents an insurmountable barrier to gaining membership in the EU, hence their stated willingness to acquiesce to nearly any deal put on the table. In a few short years the Turkish eagerness to join may fade should their robust economy and the EU’s doldrums continue to diverge (it probably already has), so now is the time to call them on their pledge.

And the EU will never have more traction than it does now with Cyprus to get things settled.

To be sure this is a complicated issue to settle, involving the need to adjudicate tens of thousands of claims to property seized when Turks and Greeks fled to what became their own sides of the island. It’s also necessary to resolve the status of the Turks who moved to the island after the partition, and figure out how to fairly provide meaningful representation for the Turkish residents in a government where the Greeks will significantly outnumber them. But using the billions of dollars that Cyprus, Greece, and Turkey spend on monitoring the buffer towards resolving various legal claims would be a nifty trade.

It’s a volatile issue as well, thanks to four decades of ill will and bitter recriminations between the two groups on the island that won’t quickly fade even if a settlement is reached.

Importantly, the partition of this island not only costs the UN and the Turkish, Greek, and Cypriot governments a significant chunk of change that they can’t afford, it also diminishes the economic potential of the island: prime property on both sides of the divide have dubious ownership that makes it impossible for whoever is in possession to improve it, And as long as there are tens of thousands of troops staring at one another across a DMZ there is always the possibility that something could go awry and ignite a new conflagration.

This may be the one chance to resolve this seemingly intractable problem that’s been a thorn in the side of Europe for four decades. It would be a shame to let a crisis go to waste.

Ike Brannon is senior fellow and director of research at the R Street Institute.

Featured Publications