Turkey stands to gain a peace dividend of over EUR 17 billion every year from a solution of the Cyprus problem, according to new research published by the Cyprus Centre of the Peace Research Institute Oslo (PRIO), with new annual gross revenue of EUR 12.3 billion and annual cost savings of EUR 5.1 billion. This is equivalent to 3.5% of Turkey’s GDP. A preview of benefits to Greece also identified at least EUR 3 billion per year for Greece.
The research, entitled, The Day After III: The Cyprus dividend for Turkey and Greece, is the third in the series of Day After reports written by the award-winning team that has come to be known as The Three Ladies–Özlem OÄ?uz Çilsal, Praxoula Antoniadou Kyriacou and Fiona Mullen.
In this Day After III report, the authors look beyond Cyprus to the region, analyzing the peace dividend that awaits Turkey after a solution that unites the island, while also previewing the benefits for Greece. As always, the estimates made by the three economists are based on analysis of hard statistical data.
They 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 lasting peace and stability. This, in turn, will have positive spillover effects for tourism, transport, financial and business services, and last, but not least, energy.
Alexander Downer, the Special Adviser to the Secretary-General on Cyprus, who gave the opening address at the launch of the report said, “This report is a timely reminder of what business people on this island have been telling me for a long time: that a solution will bring huge opportunities for Cyprus, Turkey and Greece. And these benefits will long outlive any of the short-term costs.”
EUR 3.3 billion per year in tourism and transport
A solution would open up many new opportunities for regional tourism that are currently not available. The authors estimate that together with additional bilateral tourism with Cyprus and Greece, the evolution of Greece, Turkey and Cyprus as a combined destination would generate additional travel revenue flows of EUR 1.6 billion per year on average for Turkey alone.
Turkey’s transport sector has stagnated since 2005, which may be connected to the fact that the sector is closed to Republic of Cyprus flagged ships, the EU’s third largest shipping fleet. The authors 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 tariffs on gas transit to the area brings the total transport revenue to EUR 1.7 billion per year.
The peace dividend for tourism and transport combined comes to EUR 3.3 billion each year.
Financial & business services to gain EUR 7 billion
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 Cyprus’s EU membership status and low tax regime to broaden their presence in the European market by setting up branches or subsidiaries in Cyprus. The authors estimate that this would generate EUR 7 billion in annual revenue from exports of financial and business services.
Exports of goods to gain 2billion
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.
EUR 33 billion potential for foreign investment
The largest opportunity, however, comes from opening up Turkey’s 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. 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.
The authors estimate that this, together with other opportunities created by a settlement and the concomitant removal of uncertainty in the area, would lead to foreign direct investment (FDI) rising by EUR 33 billion per year from a recent peak of EUR 16.1 billion. While this figure may seem high at first sight, it should be remembered that Turkey’s FDI rose tenfold in 2004-06 and in 2008 reached only 2.5% of GDP, compared with 15.9% of GDP in the southern part of Cyprus.
Savings on property claims, budget and military spending
On the savings side, on the assumption that a solution involves a certain amount of territorial adjustment, restitution and exchange, Turkey stands to make large savings from property litigation. Using the precedent of recent property claims, the authors find that Turkey’s minimum saving would be EUR 24 billion, or 5.4% of Turkey’s GDP. Spread over ten years, this translates into savings on property litigation of EUR 2.4 billion 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.
Turkey can also make large savings on budgetary support to the north. Largely as a by-product of the Cyprus problem and northern Cyprus’s 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. The authors estimate that this would save Turkey EUR 480 million per year.
The overall peace dividend
In sum, the authors find that Turkey stands to gain total savings of EUR 5.1 billion per year and additional gross 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 Turkey’s 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 (after the first phase that began in 1999). The authors’ preview of the economic benefits to Greece 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, amongst other expected benefits.
Many analyses of a solution’s impact on the economy focus narrowly on the opportunities for intra-island trade. In the three Day After reports, the authors 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 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,” said the authors.
The report can be downloaded at www.prio.no/cyprus
