EU EFFORTS ON AID AND TRADE FOR NORTHERN CYPRUS

C O N F I D E N T I A L SECTION 01 OF 04 BRUSSELS 003225

SIPDIS

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E.O. 12958: DECL: 07/28/2014
TAGS: PREL PGOV EAID ETRD ZS EUN USEU BRUSSELS
SUBJECT: EU EFFORTS ON AID AND TRADE FOR NORTHERN CYPRUS
ARE STALLING

REF: USEU BRUSSELS 2938

Classified By: Rick Holtzapple, PolOff, Reasons 1.4 B/D

SUMMARY
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1. (C) During meetings with Dutch Presidency, Commission and
Council officials on July 26-27, EUR DAS Laura Kennedy was
told the prospects for positive developments on Cyprus looked
difficult. The Commission's proposed aid and trade measures
to "end the isolation" of the north of the island (reftel)
have been stalled in the Council by Greek Cypriot insistence
that such measures can only be approved and implemented with
the GoC's agreement and involvement. Dutch and Commission
officials said the problem has been complicated by a
preliminary Council legal services' opinion that the
Cypriot's legal arguments may have merit. The Dutch said
they have proposed a "cooling off" period over the August
break, but are determined not to let the objections of two
members (Nicosia and Athens) hold EU policy toward the
Turkish Cypriots hostage. A Presidency paper on September 2
should propose possible solutions to the specific Greek
Cypriot objections. The Dutch hope the aid package of 259m
euros, which must be unanimously approved by the Council, can
be agreed at the September 13 GAERC (EU FMs') meeting. They
then hope the trade measures, where there is an argument
about whether they can be adopted by qualified majority or
only by unanimity, would be adopted by the end of September.
As the EU struggles to get its measures passed, all EU
officials urged the US to move ahead with our own package of
aid and trade opening with the north. END SUMMARY.


2. (U) This is a joint USEU/Embassy The Hague report. DAS
Kennedy's discussions on Turkey are covered septel.


3. (U) On July 26 and 27, DAS Kennedy met with a team of
Dutch Presidency officials (Pieter de Gooijer, MFA Director
for European Integration; Hannie Pollmann-Zaal, Director for
Western and Central Europe; and Jurriaan Kraak, Enlargement
Counselor of the Dutch PermRep in Brussels) as well as, in
separate sessions, with Fabrizio Barbaso, the Commission's
acting Director General for Enlargement; Leopold Maurer, Head
of the Commission's Cyprus Unit; and Christoph Heusgen,
Director of the Council's Policy Planning Unit.

TWO MEASURES TO "END ISOLATION" OF NORTH BLOCKED
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4. (C) All of the EU officials began their discussion of
Cyprus by noting that in the immediate aftermath of the
Cyprus referendum, the EU FMs at their GAERC meeting on April
26 expressed their "determination to put an end to the
isolation of the Turkish Cypriot community" and invited the
Commission "to bring forward comprehensive proposals to this
end." Heusgen noted that some political steps had been
taken, such as receiving "TRNC Prime Minister" Talat at a
higher level in EU capitals. But the real action lay with
the proposals for increased EU aid to and trade with the
north of the island that the Commission had brought forward
on July 7 (reftel).


5. (C) Barbaso noted the Commission had proposed three sets
of measures. The first, known as the "Green Line Regulation"
would permit intra-island trade across the Green Line. This
regulation has been adopted by the Council, with the support
of the Greek Cypriot government, and is now in the process of
being implemented. But the other two pieces, one for 259m
euros of assistance that would be spent directly in the
north, and one for approval of procedures that would allow
for direct trade between the rest of the EU and the north,
have been blocked in the Council by the Greek Cypriots.
(NOTE: Both the Commission and Dutch said that another
Turkish Cypriot desire, direct flights into the north, had
been "carefully left out of the package." The Commission has
said this is an issue for individual states, not the EU as a
whole. END NOTE.)


6. (C/NF) De Gooijer and Kraak said negotiations in the
Council had been very difficult. Kraak said the Commission,
apparently "fed up" with the Greek Cypriots, had taken a
"rather inflexible" stance and is opposing giving them any
role in implementation of the measures other than the Line
Regulation. The UK and "some of the Nordics" had been active
in trying to overcome Cypriot and Greek opposition, but "many
Member States don't want to get involved." De Gooijer said
the Dutch objective is to make progress as soon as possible,
and certainly by the end of the year.

GREEK CYPRIOT OBJECTIONS TO AID PACKAGE
--------------


7. (C) Both the Dutch and the Commission indicated they
thought the 259m euro aid package would be approved in
September, despite the requirement that it be unanimously
adopted by all EU Member States, as Nicosia says it supports
it. But Kraak and Maurer both noted several outstanding
disagreements between Nicosia and the Commission (and
others). The Commission would like the assistance to be used
as broadly as possible, including for educational and
administrative training efforts; the GoC wants the package
focused only on economic development. The GoC says delivery
of the aid should not involve local "authorities"; the
Commission says this is unworkable. The GoC insists projects
should be consulted with or even approved by them to ensure
"island-wide planning"; the Commission and Dutch view this as
a "red herring." (NOTE: DAS Kennedy noted that she had
"politely declined" a similar demand by GoC FM Iacovou on the
USG aid package for the north. END NOTE.) The Commission
wants the Regulation to explicitly note that Turkish Cypriot
enterprises are eligible for tenders; the GoC objects. The
original Commission proposal was silent on the issue of
expropriated property. The GoC objected, pushing for
language that Maurer said would imply the Commission would be
responsible for "compensation" for any impact of projects on
Greek Cypriot property; something the Commission could not
accept. The Commission is considering language that would
oblige them to check that no Greek Cypriot property is
involved in a project. But Maurer noted that this could make
some infrastructure projects, such as water and sewer
projects, difficult to implement, and the UK has objected to
such a procedure being included in the Regulation.

AND ALSO OBJECTS TO THE TRADE MEASURES
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8. (C) De Gooijer commented that, even if the GoC had serious
issues with the aid package, the proposed trade measures are
"even harder for them to swallow." Nicosia argues that
direct trade from the north to the rest of the EU, rather
than via the south, will promote continued division of the
island, not reunification. No one else agrees with them.
But the GoC has also argued that the "legal basis" chosen by
the Commission for its trade regulation (Article 133 of the
Treaty of the European Communities) is invalid, because it is
supposed to be applied to "third territories" outside the EU.
The GoC says that the correct "legal basis" would be
Protocol 10 of the Accession Treaty, which suspends
application of the EU acquis communitaire to the north of the
island. The reason this is important is because actions
under Article 133 can be approved by a qualified majority
vote (QMV) of the Council, while actions based on Protocol 10
would require unanimity, giving the GoC a veto on the
proposal. The GoC would almost certainly use this veto to
demand significant changes to the package, forcing all trade
to leave the island via the south and insisting that the GoC
must authorize the Turkish Cypriot Chamber of Commerce to
issue certificates of origin and other documentation.
(Maurer noted the Commission had accepted a requirement for
GoC authorization of TCCoC certificates under the Line
Regulation, but that this should not be necessary for trade
not destined for the south of the island. The Dutch
Presidency, however, had been indecisive on this point so
far.)


9. (C) Unfortunately, the GoC objections to the "legal basis"
have been supported by Athens and, more importantly, the
interim oral opinion of the Council Legal Services. The
Commission lawyers emphatically disagree with their Council
colleagues. (NOTE: We are told there is a history of bad
blood between the two legal offices.) The Commission (in a
non-paper provided to EUR/SE) argues that Article 133 is not
just for third countries, but has been applied to trade with
EU territories that are not part of the EU's "customs
territory" such as Gibraltar. Maurer said other examples
would include the Spanish territories of Ceuta or Melilla,
and certain special territories in Germany and Italy.

SO NOW WHAT?
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10. (C) Kraak said that the Council last week had decided it
would not force the issue through under QMV at this point.
The Dutch decided to use the August break as a "cooling off"
period. They also are waiting to receive the Council legal
service's written opinion on the "legal basis" question
before plotting the way ahead. But they plan to prepare a
Presidency paper by September 2 that would inventory
outstanding problems on both draft regulations, and suggest
possible solutions. De Gooijer said the Dutch would like to
reach agreements as early as possible, with targets being to
agree on the aid package at the September 13 GAERC, and the
trade proposal by the end of September. But he admitted it
could take longer, saying "we will work hard in September and
October." De Gooijer added that it could take time, but the
23 could not be held up by just two members on this.
"Eventually, there will be a decision" and there would be an
aid package and a trade package. He insisted Nicosia alone
could not dictate the entire EU's policy toward the Turkish
Cypriots. On how exactly to force Nicosia's hand, de Gooijer
was less precise. He said political pressure could be
applied and the Presidency could start exploring about "what
else do they want." This could conceivably include some
amendments to the package, or concessions to the GoC in other
"outside" policy areas. Somewhat offhandedly, de Gooijer
even speculated that the Presidency could approach the issue
"somewhat gradually" by accepting GoC demands that all trade
go via the south, and then, when that failed, resuming
pressure on Nicosia to be more flexible.


11. (C/NF) Barbaso said several scenarios are possible in
September and much will depend on the attitude of the
Presidency. The Council could try to get approval of the aid
package, unanimously, on September 13; and then go ahead and
adopt the trade regulation under Article 133, simply
outvoting Nicosia and Athens. Barbaso said the GoC could
then decide whether to contest the regulation at the European
Court of Justice, but that while the case was being
considered the regulation would be in place and direct trade
could begin. But the Commission would have to convince the
Dutch and enough Member States to take this approach, and
Barbaso dryly observed that such a confrontational strategy
was "not common practice" in the EU. Maurer (strictly
protect) put the problem more bluntly, "The Member States are
cowards. We are even unsure that the UK would be willing to
push the issue that hard."


12. (C/NF) Some states were also a bit unnerved whenever the
Commission looks like it is taking action over the will of a
Member State. But the Commission also has some leverage in
the debate. Under the EU treaties, unless the Commission
assents to the change, the Council can only change the legal
basis of the regulation by unanimity, if the UK or one of the
Nordics objects, the Council cannot act. The Commission was
also trying to explore the views of various Member States,
noting they had been surprised by the "bad behavior" (NFI) of
the German Ambassador during last week's debate. But Maurer
speculated that the Dutch would be very cautious because the
overriding objective of the Presidency is to get a good
result on the question of Turkish accession negotiations in
December (septel) and so they need the GoC to stay reasonable.

IF THEY SUCCEED
--------------


13. (C) Maurer and Barbaso said the Commission had not yet
done detailed planning for implementation of the aid package,
but the Commission was leaning toward using the European
Agency for Reconstruction (EAR),a Thessaloniki-based agency
established to administer EU aid to KOSOVO, SaM and
Macedonia. This would mean about 20 people on the ground in
Cyprus to administer the aid. Maurer said serious work on
programming the aid would begin in the fall, but the
Commission was already concerned about the north's
"absorptive capacity" given that 259m euros was a lot of
money to spend on such a small population and territory, and
one with some reasons for concern about corruption. The
overall priorities, however, would track "with what we would
have done if a solution had been agreed." Small and medium
size enterprise development would be important, and other
investments would focus on environmental issues such as waste
management and sewer systems, water systems, energy networks,
telecoms and agriculture. Money would also probably be spent
on developing administrative capacity, particularly on public
health and veterinary institutes, and border and harbor
management. Finally, the EC would look at "people-to-people"
programs including scholarships and youth exchanges.


14. (SBU) As part of the Line Regulation, the Commission is
already beginning work on expert exchanges to ensure all
procedures are adequate, including application of strict
rules of origin and veterinary and phyto-sanitary inspection.
Maurer noted that under the current regulation, trade in
animal products (including cheese) and potatoes was excluded.
A quota system would also be in place to reduce the risk of
fraudulent trade such as that found by the EU in sugar from
the Balkan states. In response to DAS Kennedy's inquiry
whether, given the negligible quantity of trade likely from
the north to the U.S., the EU-authorized procedures and
certificates could be used by the U.S. for implementation of
our own trade measures, Maurer and his staff said there was
no problem with this from the EU side, if such documentation
would be acceptable to US authorities.

HOW THE U.S. CAN HELP
--------------

15. (C/NF) Both the Dutch and the Commission encouraged DAS
Kennedy to have the U.S. move ahead with our own measures to
end the north's isolation, and not wait for the EU. Barbaso
and Maurer said they hoped US implementation of aid and trade
opening could help "pave the way" to EU action. De Gooijer
also said that US action could be a helpful signal to the GoC
that "this is the way things are going to go" and might help
show Nicosia "the limits of their ability to oppose" contacts
between the Turkish Cypriots and the outside world. De
Gooijer noted that Papadopolous is "not in touch with
Brussels realities" and needs to be led on this score. The
implementation of US trade measures could also demonstrate to
Cyprus that direct trade from the north does not have to
equate with political recognition. De Gooijer also suggested
that US officials, in contacts with the GoC, could help
reinforce the Dutch message that the Commission's measures
are almost inevitable by telling the Greek Cypriots that "our
impression after talking to folks all around the EU is that
these decisions are going to be taken." DAS Kennedy noted
the Dutch suggestion, although it would be delicate for us to
speak for the EU. But we would certainly continue to work on
our aid and trade measures.


16. (C) De Gooijer also inquired as to the prospects for UN
action. DAS Kennedy said the UK will lead the UNSC
discussions in the fall. We hoped for a UNSCR endorsing the
SYG's good offices report, but would not support a
waterred-down UNSCR that did not go as far as the SYG's
recommendations. She noted there was also the upcoming
report on UNFICYP mission would prompt consideration on what
sort of continued UN peacekeeping mission was or was not
appropriate, especially with so many other places in need of
such troops.


17. (C) DAS Kennedy asked if there were EU interest in "just
dropping the Cyprus package," particularly considering a
potential nexus with the decision on Turkish accession. De
Gooijer reiterated that the EU would not allow Nicosia to
control the Union on this issue, either. "Cyprus is a member
state whose concerns we must take seriously," he offered,
adding "but not to the detriment to the interests of the
whole."

TURKISH PERSPECTIVE
--------------


18. (C) In a separate meeting with DAS Kennedy, Mustafa Oguz
Demiralp, Turkish Ambassador to the EU, said the GoT was very
supportive of the Commission's proposals. Turkey will
continue to lobby for an EU decision in September, but
Demiralp said he would not be surprised if there was no quick
action. He added that back in May he had already told Ankara
not to expect too much; the Commission would draft good
proposals, but the Council would find it hard to approve them
because of Greek Cypriot obstructionism. He argued that more
important would be bilateral measures, particularly by the UK
and US to open up to the north. When DAS Kennedy noted that
our aid package was far smaller than the EU's, but that we
had declined GoC demands to be consulted on its disbursement,
Demiralp replied that this political signal was far more
important than the sum of money. Demiralp also underlined
how failure to make progress on opening measures would harm
the reunification effort, as people in the north would be
discouraged to see that despite their positive vote in April
no real steps to end their isolation were being taken.
Responding to DAS Kennedy's encouragement to the GoT to
consider a symbolic step on troop withdrawals from the
island, Demiralp said he understood the point, and heard it
frequently from Enlargement Commissioner Verheugen, but that
it would be very hard for a Turkish politician to explain the
gesture to the public until some concrete measures had been
taken to help the Turkish Cypriots.

COMMENT
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19. (C) The GoC appears to have the EU at an impasse. EU
officials such as de Gooijer or Heusgen insist GoC President
Papadopoulos does not understand how the EU works and will
eventually have to show flexibility or "pay the price." But
we wonder, particularly with the decision on Turkey looming
in December, just how high a price the Dutch Presidency and
the rest of the EU will be willing to impose. The GoC knows
this too, and will be looking to do as much as it can to
water down the Commission's proposals come September.

SAMMIS