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European Parliament Elections: The moment of truth?

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With voters from the 28 EU member states casting ballots on May 23-26 to elect their representatives for the European Parliament, political forces across the bloc have been pitching their programs to the public and trading mutual accusations. Voting begins on Thursday, starting with the Netherlands and the United Kingdom, and continues over four days. German Chancellor Angela Merkel hails the upcoming vote as “special,” and of “great importance.” However, even though the election campaign is in full swing now, its internal intensity and unpredictability are something mainly the participants and experts are really interested in. What is the balance of forces, public expectations, fears and new trends characterizing the situation ahead of Thursday’s vote – the ninth parliamentary election since the first direct elections were held in 1979?

There are eight factions and political groups in the 751-strong European Parliament.  Eighteen MEPs are independents. According to May 18 opinion polls,: 

– The center-right European People’s Party (EPP) is expected to garner 168-178 seats (minus 43-48 seats)

– The center-left Progressive Alliance of Socialists and Democrats (S&D) is projected to get 151-153 (minus 35-38),

– The Alliance of Liberals and Democrats for Europe (ALDE) and the “En Marche!” movement of French President Emmanuel Macron – 102-104 seats (plus 34-37).

– The EU-sceptics are spearheaded by the Matteo Salvini bloc (European Alliance of Peoples and Nations, EAPN), previously known as “Europe of Nations and Freedoms” (ENF) – between 70 and 82 seats (plus 34-45),

– European Conservatives and Reformists (ECR) – between 60 and 61 seats (minus 9-17).

– The group of Euro-sceptics of the 5 Stars Movement and the Brexit Party (formerly Europe of Freedom and Direct Democracy, EFDD) – between 45 and 49 seats (plus 3-7).

– Moderate euro-sceptics from the “European United Left” – 50-52 (could lose up to 2 seats).

– European Greens/Free European Alliance (Greens/EFA) – 55-56 seats (plus 4-5).

– And, finally, new party candidates and independents can count on 49-52 seats (plus 28).

Centrists are believed to win 395 seats, right-wingers – 208 seats, left-wingers – 123 mandates, with 25 seats expected to go to the independents. According to many experts, pro-European candidates could win about 468 seats, “euro-sceptics”, with their ever-changing ideological “base” – around 256 seats, with the independents expected to end up with 27 seats.  In the 2014 elections “euro-sceptics” accounted for about a third of all MEPs (250 deputies). Five years ago, the opponents of an overcentralized European Union managed to “more than double” their membership in the European Parliament.

The overarching agenda of this week’s vote hasn’t changed for more than six months now, and reflects a rapid decline in the people’s confidence in the traditional European parties and their ability to adequately address the domestic and external challenges the EU is facing today. European voters are worried by the current erosion of their countries’ national independence, Brussels’ migration policy, the economic slowdown and growing social inequality, and what they perceive as unfair distribution of the benefits of globalization. Finally, anti-immigrant rhetoric has strengthened the hand of political forces that until recently had little, if any, chances of challenging the mainstream political parties.

Public trust in the leaders of the traditional political forces that dominated the European Parliament during the past decades has hit the rock bottom, with the future of the center-right European People’s Party (EPP), which is the largest faction in the European Parliament (217 seats), thrown in doubt by Angela Markel’s announced departure from big-time politics in 2021. During the course of the election campaign, the EPP has failed to find a middle ground amid the ever-heating debates between liberals and nationalists. The EPP leaders’ attempts to avoid taking a clear ideological stand only added to their voters’ disillusionment and even resulted in some of them joining the “euro-sceptics”, liberals or social democrats. Seeing the failure of their efforts to resist the “populists,” the EPP shifted their political agenda to the “right,” grudgingly adopting, though in a softer way, some of the ideas espoused by the “euro-sceptics.”

As for the center-left Party of European Socialists (PES), which has traditionally ranked second in the number of seats they hold in the European Parliament (currently 189), remains torn between the desire to preserve its image of a defender of the “welfare state” and the need to convince voters of its the ability to address the most acute problems now facing Europe. By the end of April, the Social Democrats had managed to appease, at least for now, their voters who blame the party for the migrant crisis of the past few years. In addition, the formal consolidation of the “nationalists,” coupled with the public disappointment with the half-measures proposed by President Macron in response to the “yellow jackets” protests even won the center-leftists several potential seats in the European Parliament.

The election campaign by liberals and “euro-optimists” produced mixed results: on the one hand, they could significantly increase the size of membership in the European Parliament (by 34 seats), and become the third largest faction there. The united liberal faction, Emmanuel Macron is staking on could, under certain circumstances, get a “controlling stake in the EP whose support would be crucial in cobbling together a large pro-European coalition in the EP. On the other hand, Macron’s stated desire to invest the pan-European institutions with a new quality (see his March 5 address to European voters), apparently failed to impress EU voters. Macron’s March 5 address thus could give his supporters just two or three potential seats in the EP. Although apparently succeeding in mobilizing the traditional left-and right-centrists, Emmanuel Macron has hardly managed to win over at least some of the representatives of the new European right. It is highly unlikely that, with the situation developing as it is, the liberals will be able to form a faction in the European Parliament large enough for their leader to claim the post of European Commission President.

Meanwhile, the situation in the euro-sceptic camp is equally paradoxical with Italy’s “nationalist” Deputy Prime Minister Matteo Salvini leading the coalition of opponents of an increasingly centralized European Union. Early this year, Salvini, who is also the leader of the “far-right” League party, floated the idea of “reformatting Europe” by creating an electoral coalition of “sovereignists” and “populists,” including in some countries of Central and Eastern Europe. In addition to Matteo Salvini’s League Party, the coalition of “right-wing populists” includes the Austrian Freedom Party, the French National Rally led by Marine Le Pen, the Alternative for Germany Party, the Finns Party, and the Flemish Interest Party in Belgium, as well as a bevy of smaller parties from Bulgaria, Denmark, Slovakia, Slovenia, the Czech Republic and Estonia. Hungarian Prime Minister Viktor Orban’s national conservative Fidesz Party is considering joining the coalition in the event of its expulsion from the European People’s Party faction after the elections. Poland’s ruling Law and Justice Party could also join in. Such a coalition could theoretically pose a challenge, at least to Macron’s “globalists,” but could it possibly turn the European Parliament into a place where “euro-sceptics” would call the shots?

The past month has seen Salvini’s supporters potentially increase their seats in the EP by another 10 to 15, even despite the League’s waning popularity at home. The euro-sceptics’ weak point, however, is the diversity of their political platforms. The opponents or a more centralized EU are a patchwork of nationalists, separatists, populists, and radicals of every hue. They are divided on many things, including the EU policy towards Russia. In addition, becoming a part of “the power pyramid” “inevitably increases internal differentiation, centrifugal tendencies, and even splits.”

Finally, as soon as they come to power, the onetime oppositionists are inevitably confronted with public political responsibilities they are not used to bear, as well as temptations of their newly acquired high status. This is exactly what happened to the Austrian Freedom Party. May 18, it was announced that its leader, Heinz-Christian Strache, was resigning as the country’s vice-chancellor amid a scandal. The accusations against the Freedom Party leadership over their alleged corruption has resulted in new elections and could undermine the “ultra-right” parties’ chances in the upcoming elections to the European Parliament.

Of much attention to observers was the personal struggle waged throughout the election campaign by Emmanuel Macron and Matteo Salvini for riding the wave of public discontent with the establishment – a struggle the euro-sceptic Salvini is very likely to win. However, the most organized “right-wing populists” will hardly be able to prevail over the conservatives and social democrats when it comes to the number of their members serving in the next European Parliament. Therefore, all the “euro-sceptics” and “populists” can hope for is a split in the right-centrists’ camp   after the elections. As for Macron, he can count on fortifying his positions in the new European Parliament.

Finally, the situation around Britain’s exit from the EU also factored in the election campaign, with a delayed Brexit and London’s dithering over a second Brexit referendum adding potential votes to pro-European parties (a potential “plus” of between 18 and 20 mandates) as well as to “populists” and “euro-sceptics” (a combined addition of between 30 and 35 mandates).  Simultaneously, in the pro-European camp, the delayed Brexit has played into the hands of the Social Democrats and liberals, while undermining the chances of the European People’s Party. The endless postponements of Brexit have also undermined public support for the idea of some countries leaving the EU, while adding credence to the idea of just giving individual EU states greater control over the activities of the European bureaucracy.

As a result, public opinion polls released ahead of Thursday’s vote predict the end of the decades-long predominance of the two largest factions – Christian Democrats and Social Democrats, and the formation of an even more fragmented European Parliament. There is a growing danger of European politics returning to the “confrontational model” of the past. If this happens, it would erode the European Parliament’s political weight, further undermine the efficiency of its legislative work, its ability to take quick decisions and coordinate long-term, strategic initiatives, thus diluting their essence.

With all this being said, the “euro-sceptics” could still be able to strengthen their positions and even win over a third of the seats in the EP, which would allow them to block decisions by a qualified majority. However, their potential coalition will be rather shaky, first in view of the UK MEPs’ likely departure and, secondly, due to the need to preserve unity in their own ranks, represented by a growing number of parties and movements critical of the EU. For their part, the pro-European forces have good chances of retaining their formal majority in the EP, but with their three core factions carrying almost equal political weight, this could lead to increased frictions in the way they will be handling hot-button issues. Including who will head the European Commission, and budgetary issues. Therefore, the most likely outcome of this all will be a compromise, half-hearted decisions, fraught with further disorganization of the EU policy and its fragmentation along national and regional lines.

 First published in our partner International Affairs

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Is British Democracy in Danger?

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On Sunday 12th of December 2021 Boris Johnson went on national television to warn about a tidal wave that would threaten Britain. He was back then referring to the Omicron Covid-19 variant, little did he know back then that he could have been referring to his own political future. Johnson is facing increasing demands from his own party to step down after having admitted to attending a party in Downing Street on May 20th, 2020, during the UK’s first national lockdown.

Johnson has been facing increasing risks for quite a long time by now: from collapsing poll ratings, to violation of lockdown rules and an ill-managed pandemic that has continued to strain the National Health Service; among many others. These crises have compromised his moral authority both with the citizenry and with his own frontbenchers. Although in the UK confidence votes can happen relatively quick: the no confidence vote on Theresa May’s government was held on December 12th, 2018, just a day after she was informed that the minimum threshold had been reached, this is still not on the horizon for the current Prime Minister.

To trigger a leadership contest 15% of the Tory MPs need to submit a letter to the chair of the 1922 Committee. There are currently 360 Tory MPs, 54 of them are needed to spark a confidence vote. As up to now, very few have publicly confirmed to either have submitted or to have the intention to submit a letter. If such threshold is reached, this would open the debate as to whether there is someone suitable enough to replace him. The frontrunners are Chancellor Rishi Sunak and Foreign Secretary Liz Truss; neither have the proven record of vote-winning Boris Johnson has had ever since he was the Mayor of London. Such vote of confidence is also unlikely to happen as majority of the crises the government has faced are of their own making. Johnson is not the cause; it is the symptom of a deeper decay of the British State and their politicians.

While the Conservatives will not be able to escape the cumulative effects of current and past scandals, this latest turmoil us unlikely to trigger the collapse of Boris Johnson. The next British election is scheduled to happen in May 2024, giving both Johnson and the Tories enough time to move on from this crisis and work on rebuilding electoral support. Boris Johnson has long defied political gravity and has survived a long history of scandals and mismanagements that may have destroyed the electoral chances of many other politicians and their political parties. It is highly likely that in the coming local elections in May 2022 the Conservatives will suffer electoral defeats, this is still preferable than what the political and electoral consequences for the Conservatives would be if they were to get rid of Johnson. Sacking him now would be accepting losing the war rather than losing a battle in the coming local elections. The long-term aim of the Tories is to hold on power for as long as they can, and at least ensure their electoral base is secure coming the 2024 general elections. For this, Boris Johnson still may come in handy.

Although Boris Johnson’s record has been shockingly poor; the Tories will not give Labour a chance for a general election before the scheduled for 2024, especially not now that they are leading the polls on the question as to who would make a better prime minister. The reality is that although his ratings have plummeted dramatically over recent years, there is no real threat of a general election for at least 2 years if one considers the larger political landscape.

One of the major threats British democracy does not come from Boris Johnson but rather from a deterioration of what sustains democracy as a healthy system of government. The UK electorate is highly volatile. Unlike countries like the US whose electorate has become highly polarised, the British electorate has shown less party loyalty, and voters have switched more and more between political parties in each election. However, this volatility will not get Johnson out of office, that is something only the Conservatives can do. This is closely linked to trust in politicians and the government. Lack of trust in both is one of the major issues of contemporary democracies around the world. Trust, is, after all, the basic condition for a legitimate government. Lack of trust in politicians, institutions, political parties, and the government in general enables populist tendencies, polarisation, political extremism and impacts the voting preference of citizens. It also favours the support of more stringent stances towards minorities, opposition, immigration, and human rights violations. A second threat that should not be disregarded is the attitude towards democratic institutions and bodies that sustain the British political system. While it is true that Johnson’s behaviour does not push to extremes such as Donal Trump did, or many other highly divisive politicians around the world, he is drawn to the same unconventional styles to deal with political challenges.

Democracy around the world is facing a backlash that is organised and coming from within, from elected officials. Our democratic rights can either be taken away suddenly as a result of a revolution or a coup d’état, or gradually through the election of leaders who slowly erode rules, standards and institutions that help sustain democracy. This is potentially more dangerous for the overall prospects of democracy because gradual erosion of democratic values is harder to perceive. The state, under this progressive attack, becomes prone to the systematic corruption of interest groups that take over the processes and institutions in charge of making public policy. It is during this gradual democratic backsliding that elected officials disregard norms and institutions while, at the same time, trying to redesign the structure of the state. An informed and active citizenry is crucial to prevent further erosion of democracy. We need to be aware that it is not only democratic rules and institutions that are in danger, but also the respect of our fundamental civil, political, social and human rights.

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The French Dispatch: The Year 2022 and European Security

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2021 has been rich in negative events for European security: the world has witnessed the collapse of the Open Skies Treaty, American-French discord concerning AUKUS, the termination of the official dialogue between Russia and NATO, and the migration crisis on the Polish-Belarusian border.

Over the past year, the Western countries seem to have been searching for new strategies. Since the end of 2019, NATO has been developing a new concept, and in June 2021 at the summit in Brussels, to the displeasure of sceptics, it was possible to agree on its basis—the transatlantic agenda NATO 2030 (# NATO2030) . While the broad formulations and a direct hierarchy of threats still require clarification, new projects in the field of weapons development, combating climate change, and increasing interoperability have already been declared.

In parallel, since the end of 2020, work has continued on the EU European Parliamentary Research Service project—the Strategic Compass. The dialectic between Atlanticism and Europeanism softened after Joe Biden came to power in the United States, but the European interests and red lines retain their significance for transatlantic relations. In 2022, together with the rotating post of the President of the EU Council, the role of a potential newsmaker in this area has been transferred to Emmanuel Macron, who feels very comfortable in it.

On December 9, the provisions of the Paris programme were published under the motto “Recovery, power, belonging” France, as expected, is reiterating its call for strengthening European sovereignty. The rhetoric of the document and its author is genuine textbook-realism. But now for the entire European Union.

Objectives of the French Presidency, are not articulated directly but are quite visible—making the EU more manageable and accountable to its members, with new general rules to strengthen mobilisation potential, and improve the EU’s competitiveness and security in a world of growing challenges.

Paris proposes reforming the Schengen area and tightening immigration legislation—a painful point for the EU since 2015, which has become aggravated again in recent months. This ambitious task has become slightly more realistic since Angela Merkel’s retirement in Germany. At least a new crisis response mechanism on this issue can be successful, even if it is not fully implemented.

In addition, the Élysée Palace calls on colleagues to revise the budget deficit ceilings of the Maastricht era to overcome the consequences of the pandemic and finally introduce a carbon tax at the EU borders. The latter allows for a new source of income and provides additional accountability for the implementation of the “green” goals by member countries.

The planned acceleration of the adoption of the Digital Markets Act (DMA) and Digital Services Act (DSA), developed by the European Commission at the end of 2020, is also aimed at unifying the general legislation and consolidating the European position in the world. In other words, the French Foreign Ministry quite soberly assesses the priority areas and vulnerabilities of the European Union and focuses on them, but with one exception.

A special priority of the French presidency is to strengthen the defence capabilities of the EU. On the sidelines, the French diplomats note that the adoption of the Strategic Compass in the spring of 2022, as originally planned, is a fundamental task, since otherwise the process may be completely buried. With a high degree of probability, this is so: the first phase of the development of the Compass—the general list of threats—lasted a year, and consisted of dozens of sessions, meetings, round tables with the involvement of leading experts, but the document was never published. If Macron won’t do it, then who will?

As the main ideologist and staunchest supporter of the EU’s “strategic autonomy”, the French president has been trying for five years to mobilise others for self-sufficiency in the security sphere. With his direct participation, not only the Mechanism of Permanent Structured Cooperation (PESCO) in the defence area was launched, where France is the leader in a number of projects, but also the so-far failed European Intervention Initiative. Even without focusing on French foreign policy traditions and ambitions, the country remains a major European arms exporter and a nuclear power, where the military-industrial complex is closely affiliated with the state.

Implementing the 2022 agenda is also a matter of immediate political gain as France enters a new electoral cycle. The EU Summit will take place on March 10-11, 2022, in Paris, a month before the elections, and in any case it will become part of the election campaign and a test for the reputation of the current leader. Macron has not yet officially announced his participation in the presidential race, but he is actively engaged in self-promotion, because right-wing politicians espousing different degrees of radicalism are ready to take advantage of his defeats to purchase extra points.

The search for allies seems to be of key importance for victory at the European level, and the French Foreign Ministry has already begun working on this matter. In 2016–2017 the launch of new initiatives was predetermined by the support of Germany and the Central and East European countries. The change of cabinet in Germany will undoubtedly have an impact on the nation’s policy. On the one hand, following the results of the first visit of the new Chancellor Olaf Scholz to Paris on December 10, the parties announced the closeness of their positions and a common desire to strengthen Europe. On the other hand, the coalition of Social Democrats (SDP) was made up with the Greens and Free Democrats (FDP) who are not at all supporters of excessive involvement in security issues. What “strategic autonomy” means for France, constitutes a more restrained “strategic sovereignty” for Germany Therefore, an intensification of dialogue with Italy and Spain, which are both respected and potentially sympathetic, is likely. The military cooperation agreement concluded in the autumn of 2021 with Greece, an active member of PESCO, can also help Paris.

Gaining support from smaller countries is more challenging. Although the European project is not an alternative to the transatlantic one, the formation of a common list of threats is a primary task and problem for NATO as well. As mentioned above, it is around it that controversy evolves, because the hierarchy determines the distribution of material resources. The countries of Eastern Europe, which assume that it is necessary to confront Russia but lack the resources to do so, will act as natural opponents of the French initiatives in the EU, while Paris, Rome and Madrid will oppose them and the United States in the transatlantic dialogue. The complexity of combining two conversations about the same thing with a slightly different composition of participants raises the bar for Emmanuel Macron. His stakes are high. The mobilisation of the Élysée Palace’s foreign policy is one of the most interesting subjects to watch in the year 2022.

From our partner RIAC

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Unilateral vs Bilateral Euroisation: Political, technical and practical issues in the curious case of north Cyprus

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The island of Cyprus has been split between a Greek Cypriot south and a Turkish Cypriot north since 1974. The Turkish Cypriot state declared in the north is recognised only by Turkey, while the Republic of Cyprus in the south is recognised internationally and is a European Union (EU) member since 2004. In 2004, 65 percent of Turkish Cypriots voted in favor of the United Nations’ Annan Plan for reunification only for Greek Cypriots to reject it. As a result, Cyprus joined the EU as a de facto divided island. Despite joining the EU as a divided island, the whole of Cyprus is considered an EU territory. However, the EU law is suspended in the north until reunification is achieved.

This resulted in the euro being the legal tender only in the southern part of the island. With the recent and continuous depreciation of the Turkish lira, the long-standing question of whether and how the north could switch to the euro has once again intensified. While a bilateral adoption of the euro is not on the cards until a reunification on the island, north Cyprus could technically unilaterally adopt the euro. However this could cause complications in the future as the EU is adamant that unilateral euroisation cannot be used as a mechanism by Member States to circumvent the stages foreseen by the Maastricht Treaty.

Under normal circumstances, “Member States with a derogation”, i.e. the Member States that have not yet fulfilled the necessary conditions for the adoption of the euro are first required to enter the Exchange Rate Mechanism (ERM II) to achieve eurozone membership. This is a “waiting room” where any country aspiring to adopt the euro is required to stay for at least for two years. It is now a well-known fact that the ECB shares the opinion of the Economic and Financial Affairs Council (ECOFIN), i.e. the meeting of the finance ministers of EU Member States adopted in 2000, that this requirement should not be waived. Assuming the northern part of Cyprus is considered a Member State, the same principle will apply and therefore it would not be welcome to adopt the euro unilaterally, bypassing the convergence process foreseen by the Treaty for the adoption of the euro.

Currently, ERM II comprises the currencies of Bulgaria, Croatia and Denmark. Just like these countries, north Cyprus would be expected to peg its national currency to the euro and, given the consent of the European System of Central Banks, fixe a “central exchange rate” and a “deviation margin” under Exchange Rate Mechanism (ERM II) for a duration of no less than two years. If successful based on its ERM II performance, a final exchange rate would be determined and the redenomination would be done over a transition period. 

In the case of north Cyprus, it is understood that the EU might have already agreed to apply a fast track approach where there would be a one-year transition period. However, this has not been confirmed officially by the EU so the EU’s stance in practice is not known. After all, even Denmark, a Member State which has negotiated an opt-out arrangement before the adoption of the Maastricht Treaty has been participating in ERM II although it chose not to adopt the euro. So the EU’s approach in the case of northern Cyprus would not expected to be too lenient. There is no way to find out unless north Cyprus continues the dialogue with the EU.

In the meantime, a more relevant question is whether a unilateral euroisation could be possible. The short answer is yes. For instance the euro was introduced in Kosovo and Montenegro that did not have a status of a sovereign state at the time. In both cases, the decision was made in 1999. Kosovo, defined the Deutsche Mark as the designated currency, which was replaced by the euro in 2002. Similarly, Montenegro introduced a parallel currency system in 1999, in which the Deutsche Mark was allowed to circulate alongside the then legal tender. In 2001, the Deutsche Mark became the only legal tender and was replaced by the euro in June 2002.

In the case of Montenegro, now an official EU candidate, the adoption of the euro without an agreement with the European Central Bank (ECB) was acknowledged by the European Commission as a measure which had to be taken due to “extraordinary circumstances” present in the country at the time. This could be precedent for north Cyprus. However, it is important to note that the ECB still supports the view that unilateral euroisation is not compatible with the Maastricht Treaty and cannot be a way to bypass the convergence process.

The implications of the Treaty framework for in the case of Montenegro currently remain unknown and are expected to be detailed “by the time of possible future negotiations for accession to the EU”. In particular it remains uncertain whether the country would be required to introduce its own currency before it can join ERM II. Should this be the case as Montenegro makes further progress towards EU membership, this would entail substantial operational and changeover costs. Authorities in north Cyprus, should therefore monitor the developments very closely.

Normally, non-euro area Member States are denied the option of unilateral euroization due the principle of equality, i.e. the EU considers bypassing the convergence process incompatible with the EU Treaty and actively discourages it.In particular, the Treaty sets out that there has to be a Community assessment of the fulfilment of these criteria and mutual agreement on the appropriate exchange rates. This means that the ECB does not welcome unilateral euroisation, as such an adoption of the euro outside the Treaty process would run counter to the underlying economic reasoning of European Monetary Union.

However, as north Cyprus is already an EU territory the adoption of the euro could be considered a “common interest of the EU” and therefore an exception could be possible. In fact, the policy of the EU with regard to the Turkish Cypriot community which was set out by the General Affairs Council in 2004 states that “the Council is determined to…facilitate the reunification of Cyprus by encouraging the economic development of the Turkish Cypriot community”. So in the case of north Cyprus, a switch to the euro could be allowed by way of exception although this would obviously imply circumventing the process of multilateral assessment by the EU Member States.

While the EU could give the green light to adoption of the euro by north Cyprus without a successful exchange-rate procedure under ERM II, it would not allow this to undermine the process of convergence prior to the adoption of the euro. In other words, the Convergence criteria outlined in the Maastricht Treaty would still remain relevant and important as the Treaty requires Member States to achieve a high degree of sustainable economic convergence before they can join the euro area.

In other words the economies of Member States with a derogation must be able to keep pace with those already using the euro. Exchange rate stability, for instance, is evaluated by assessing whether the exchange rate of the country’s currency has remained within the fluctuation bands provided for by ERM II for at least two years without devaluating against the euro.

Besides exchange rate stability, the convergence criteria also include price stability, sound public finances, and convergence in long-term interest rates. This means, for instance, that a country’s long-term interest rate, measured on the basis of long-term government bonds or comparable securities, should not exceed that of the three best-performing Member States in terms of price stability by more than 2 percentage points during the one-year observation period prior to the assessment.   

On the other hand, a country is considered to meet the price stability criterion if its average inflation rate does not exceed the inflation rate of the three best-performing EU Member States by more than 1.5 percentage points during a one-year observation period. These criteria are intended to ensure the sustainability of public finances and that the government is able to manage its debts.

Article 140 (1) of the Treaty on the Functioning of the European Union (TFEU) requires the European Commission (EC) and the European Central Bank (ECB) to report to the Council, at least once every two years, or at the request of a Member State with a derogation on the progress of the country in fulfilling their obligations regarding the achievement of economic and monetary union. In addition to preparing these “Convergence Reports”, both the ECB and the Commission regularly monitor progress throughout the year.

A Convergence Report is normally published at least once every two years or at the request of an EU Member State which would like to join the euro area. Both the ECB and the European Commission issue these reports describing the progress made by non-euro area Member States towards achieving the criteria necessary for a country to adopt the euro. According to the latest report, among countries legally committed to adopting the euro, Croatia and Sweden fulfil the price stability criterion, Bulgaria, Czechia, Croatia, Hungary, Poland and Sweden fulfil the criterion on public finances, Bulgaria, Czechia, Croatia, Hungary, Poland and Sweden fulfil the long-term interest rate criterion. However none of them meet all the requirements for adoption of the euro. So convergence process is very strict and challenging.

In particular, it should be noted that convergence must be sustainable, meaning that satisfying the economic convergence criteria at one point in time is not enough and they are expected to be met on a lasting basis. A Member State’s general financial position is considered sustainable based on two criteria, namely, the government’s annual fiscal deficit should not exceed 3% of gross domestic product, and overall government should not exceed 60% of gross domestic product. This is very important for northern Cyprus as it will need to ensure that its economy is resilient.

It is known that the Maastricht Treaty provides some flexibility and the final assessment depends on the ECOFIN Council. Whether and how this would apply in the case of northern Cyprus remains a mystery. While details remain unknown to the public, the one-year transition period envisaged in the case of northern Cyprus could be related this. However, it should be noted that the decision on whether north Cyprus can adopt the euro would ultimately be a political one and would lie with the Council of the European Union. This means that representatives from all EU countries would be required to take a decision based on a proposal by the EC and after consulting the European Parliament.

Given that participation in the ERM II is a precondition for as well as fulfilment of the nominal convergence criteria to join the euro, it is binding and is unlikely to be waived for any country regardless of any special circumstances. This is because ERM II provides the framework to manage the exchange rates between EU currencies, which is necessary for exchange rate stability. As such north Cyprus would be expected to participate in the mechanism without devaluing its central rate against the euro before it can qualify to adopt the euro.

While no provision of the EU Treaty states explicitly that Member States with a derogation must have their own currency, the Treaty is by and large based on this assumption. In addition, the entry into ERM II is decided by mutual agreement of all ERM II parties, which consist of the ministers of the euro area Member States, the President of the ECB and the minister and the central bank governor of Denmark, as the only non-euro area Member State currently participating in the mechanism.

So in the case of north Cyprus adoption of the euro could mean that the country should first introduce its own currency. This could be a more viable alternative and north Cyprus could then peg its currency to the euro as a preparation for an eventual switch to the euro. Indeed, some countries joined ERM II with their preexisting currency pegs. To give a recent example, the currencies of Bulgaria and Croatia were already closely tied to the euro at the time of applying to the ERM II. Bulgaria had a currency board, first with the Deutsche Mark, and subsequently with the euro after 1999. Croatia had a peg first with the Deutsche Mark, and from 1999 to the euro, with a narrow band.

During this process, legal requirements should not also been underestimated. Article 140(1) of TFEU requires the convergence reports to assess the compatibility of national legislation, including the statutes of the national central bank and the Statute of the European System of Central Banks and of the ECB. There could also be additional unprecedented requirements and countries may be required to commit to implementing specific policy measures on a variety of topics. For instance, in the case of Bulgaria and Croatia, such requirements range from the anti-money laundering framework, state-owned enterprises and the insolvency framework, to the non-banking financial sector, corruption and even organised crime. It is highly unlikely that the national legislation in north Cyprus is currently compatible with that of the EU as the latest convergence report suggests that the respective national legislations in none of the seven new EU Member States would be deemed “fully compatible” with the exception of Croatia.

In fact, the former north Cyprus President Mustafa Akıncı himself had confessed that “serious work” would needed to ensure the harmonization of the national institutions with the EU acquis. As can be seen in the case of Croatia and Bulgaria, this has now become a prerequisite not only for joining the EU but also in terms of adopting the euro as a new Member State. For instance, this was the main reason behind the delay in Bulgaria’s acceptance to ERM II. Bulgaria was able to get the green light to join ERM II two years after it formally announced its intention to join the mechanism.

The delay was due to the requirement imposed by the Eurozone governments requiring Bulgaria to join ERM II and the Banking Union simultaneously. This prerequisite is known as “the Cooperation Decision” and requires Member States which adopt the euro to also participate in the Banking Union, i.e. the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF). . Therefore, participating in ERM II with a view to later adopting the euro will also involve preparing for joining the Banking Union.

This requirement will now apply to all future candidates including north Cyprus. However, it should also be noted that the procedure for entering the Banking Union is separate from the assessment of the convergence criteria. Joining the Banking Union is irreversible and involves direct powers of the SSM and the SRM over its banking system. This has important implications for the banking sector as banks that will come under the direct supervision of the ECB will also be subject to the direct supervision of the Single Resolution Board (SRB).

To be more specific, this means that, the ECB will become responsible for the direct supervision of the significant credit institutions following the “significance assessment process”. This applies to banks considered to meet the “materiality criteria” as set out in the SSM Regulation (Regulation 1024/2013) and the SSM Framework Regulation (Regulation 468/2014). The criteria include “economic importance for the country” so could technically apply to banks in north Cyprus despite their insignificant sizes in comparison to the EU economy. Therefore, for new joiners like north Cyprus the accession process would involve not only the harmonization with the aquis but also the strengthening of their institutions and administrative capacity that will enable them to implement and monitor the enforcement of the harmonized legislation.

Therefore, adoption of the euro by north Cyprus, bilaterally or unilaterally, would not be as easy as it may look. More than anything else, this would require political will, courage and determination. The former President Mustafa Akıncı, a devoted supporter of a federal solution and the EU, had set an ambitious target of the euro going into circulation “from the first day” in the case of a reunification. However with the failure of the last reunification talks in 2017 in Crans Montana, Switzerland, political conditions have changed dramatically. The current President Ersin Tatar who is a very passionate proponent of the two-state solution is wholeheartedly against the EU and the euro. Therefore, the general stance towards the adoption of the euro in the northern part of the island remains fragmented. Given these circumstances, adoption of the euro in north Cyprus seems a distant prospect.

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