Wednesday

6th Jul 2022

Opinion

Could north Cyprus unilaterally join euro to escape Turkey's lira?

  • The militarised 'Green Line' demarcating Turkish-recognised North Cyprus from Cyprus - it currently also divides the island between the Turkish lira and the euro (Photo: Marco Fieber)
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The Northern part of Cyprus has a unique status as a part of the EU where the EU law has been suspended.

In a referendum held in 2004, Turkish Cypriots living in the north voted in favour of the Annan Plan, also known as the UN Cyprus reunification plan, while the Greek Cypriots in the south rejected. So a divided Cyprus joined the EU as a full member.

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This resulted in the euro being the legal tender in the southern part of the island only. Although north Cyprus is also a part of the EU, the application of acquis communautaire has been suspended until reunification is achieved on the Island.

Reflecting their economic, political and financial dependence on Turkey, north Cyprus has opted for adopting the Turkish lira. This remains a political choice with dire economic and social consequences.

Lacking any monetary policy instruments and fiscal discipline, economy in the north is suffering the consequences of the recent unorthodox and controversial monetary policy decisions made in Turkey.

As the Turkish lira continues its downward spiral, authorities in the north helplessly watch their economic conditions and living standards severely deteriorate and can do nothing but introduce makeshift, palliative and ineffective fiscal measures.

Unsurprisingly, the long-standing debate and controversy as to whether the north could ditch the Turkish lira in favour of the euro has once again intensified.

While a bilateral adoption of the euro is not on the cards until a reunification, the question of this would work under a hypothetical reunification scenario remains a mystery as the EU rules are quite strict.

First, upon accession to the EU all new member states are required to join ERM II for at least two years before they can adopt the euro. Under a reunification scenario, it would be absurd to impose a two-year embargo on the use of the euro on one half of the island.

Second, during this transition period a so-called "central exchange rate", the irrevocable conversion rate at which the changeover to the euro from the national currency should take place would need to be in place. This would not be applicable given in the unusual case of north Cyprus where there exists no national currency to begin with.

Under normal circumstances the EU would not accept a unilateral adoption of the euro by any state aspiring to join the EU before it fulfils the Maastricht Treaty. The European Central Bank (ECB) emphasises that it "neither encourages nor facilitates" unilateral adoption of the euro.

It warns that such countries would be adopting the euro "at their own risk, without committing the EU or the ECB", explicitly stating that it would "pursue a policy of non-engagement and non-support".

While the EU Council explicitly states that unilateral euro-isation cannot be used to bypass the convergence process before the adoption of the euro, given the unique case of Cyprus the EU would be expected to grant certain concessions in the event of a reunification.

Mysterious rules

So, until a foreseeable future, a bilateral switch to the euro in north Cyprus is not on the cards. In fact, taking into account its current fiscal performance, northern part of Cyprus would by no means be deemed ready for the bilateral adoption of the euro in the first place even if it were a recognised state.

While it remains a mystery as to how the EU's standard procedures and conditions for a bilateral adoption of the euro could apply under such a scenario, whether the north could opt for a unilateral switch to the euro now like Montenegro and Kosovo is a more imminent and relevant question.

Technically speaking, unilateral euro-isation could indeed be possible with thorough and forward-looking planning. The ECB's stance is neither to prohibit nor promote unilateral adoption of the euro by any third countries. So a unilateral switch to the euro would essentially be a political decision and would be unthinkable without Turkey's approval and support, which currently does not seem very likely given the direction of the Turkey-EU relations.

Assuming Turkey gives the green light, a unilateral switch to the euro would not be a quick-fix for the legacy structural weaknesses and lack of fiscal discipline in the north. Regardless, this might give new life to reunification prospects on the island.

But unless the switch to the euro is done with the technical and logistical support of the EU, it could present itself as a major logistical and financial challenge, in terms of sourcing sufficient amount and value of euro banknotes and coins.

The EU and its institutions should lend support to north Cyprus under such a scenario as the adoption of the euro in the remaining part of the island could provide a much needed stimulus for institutional and fiscal reforms to bring the north closer to the acquis communautaire and the Maastricht criteria, as well as to the resolution of the decades-old dispute on the Island.

Author bio

Professor Dr Mete Feridun is chair of the Centre for Financial Regulation and Risk Management at the Eastern Mediterranean University in North Cyprus/Turkish Republic of Northern Cyprus.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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