Could Northern Cyprus unilaterally join the euro to escape the Turkish lira?

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The northern part of Cyprus has a unique status as part of the EU where EU law has been suspended.

In a referendum held in 2004, Turkish Cypriots living in the north voted in favor of the Annan map, also known as the UN’s Cyprus reunification plan, while the southern Greek Cypriots rejected it. Thus, a divided Cyprus joined the EU as a full member.

As a result, the euro was only legal tender in the southern part of the island. Although northern Cyprus is also part of the EU, the application of the acquis communautaire has been suspended until reunification is achieved on the island.

Reflecting its economic, political and financial dependence on Turkey, the north of Cyprus has opted for the adoption of the Turkish lira. This remains a political choice with disastrous economic and social consequences.

In the absence of monetary policy instruments and fiscal discipline, the northern economy suffers from the consequences of recent unorthodox and controversial monetary policy decisions taken in Turkey.

As the Turkish lira continues its downward spiral, the authorities in the north are helplessly seeing their economic conditions and standard of living deteriorate seriously and can do nothing but introduce makeshift, palliative and ineffective tax measures. .

Unsurprisingly, the long-standing debate and controversy over whether the north could abandon the Turkish lira in favor of the euro has once again intensified.

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

First, upon joining the EU, all new member states are required to join ERM II for at least two years before they can adopt the euro. In a reunification scenario, it would be absurd to impose a two-year embargo on the use of the euro on 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 national currency should take place should be in place. This would not be applicable given that in the unusual case of northern Cyprus there is no national currency to start with.

Under normal circumstances, the EU would not accept a unilateral adoption of the euro by a state aspiring to join the EU before it has fulfilled the Maastricht Treaty. The The European Central Bank (ECB) emphasizes that it “neither encourages nor facilitates” the unilateral adoption of the euro.

He warns that these countries would adopt the euro “at their own risk, without committing the EU or the ECB”, explicitly stating that he “would pursue a policy of no commitment and no support”.

While the Council of the EU explicitly declares that the unilateral euro-ization cannot be used to bypass the convergence process before the adoption of the euro, given the unique case of Cyprus, the EU should grant certain concessions in the event of reunification.

Mysterious rules

Thus, until the foreseeable future, a bilateral changeover to the euro in northern Cyprus is not an option. In fact, given its current budgetary performance, the northern part of Cyprus would in no way be considered ready for bilateral euro adoption in the first place, even if it were a recognized state.

While it remains a mystery as to how the standard EU procedures and conditions for a bilateral euro adoption might apply in such a scenario, whether the north might opt ​​for a unilateral passage. to the euro now, like Montenegro and Kosovo, is a more imminent and relevant issue.

Technically speaking, unilateral euro-ization could indeed be possible with careful and forward planning. The ECB’s position is neither to prohibit nor to promote the unilateral adoption of the euro by third countries. Thus, a unilateral changeover to the euro would be essentially a political decision and would be unthinkable without Turkey’s approval and support, which currently seems unlikely given the direction of Turkey-EU relations.

Assuming Turkey gives the green light, a unilateral changeover to the euro would not be a silver bullet to inherited structural weaknesses and lack of fiscal discipline in the north. Either way, it could breathe new life into the prospects for reunification on the island.

But unless the changeover is done with technical and logistical support from the EU, it could present itself as a major logistical and financial challenge, in terms of providing sufficient quantity and value. of euro banknotes and coins.

The EU and its institutions should give support to northern Cyprus in such a scenario, as the adoption of the euro in the rest of the island could provide a much needed boost to institutional and fiscal reforms aimed at bringing the north closer together. of the acquis communautaire and the Maastricht criteria, as well as the resolution of the decades-old dispute on the island.


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