This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 02 BRUSSELS 002938 
 
SIPDIS 
 
E.O. 12958: DECL: 07/09/2014 
TAGS: PREL EAID ETRD PGOV CY GR TU EUN USEU BRUSSELS
SUBJECT: NEW COMMISSION PROPOSALS FOR NORTHERN CYPRUS 
 
REF: A. USEU BRUSSELS 01870 
 
     ¶B. NICOSIA 01288 
 
Classified By: Rick Holtzapple, PolOff, Reasons 1.4 (B/D) 
 
SUMMARY 
------- 
 
¶1. (SBU) On July 7, EU Enlargement Commissioner Gunter 
Verheugen presented the Commission's plan fulfill the EU's 
pledge to end the isolation of the Turkish Cypriot community 
following their support for the Annan Plan.  The two main 
proposals are: 1) a new "preferential trade regime" allowing 
direct trade between northern Cyprus and EU Member States, 
including the rest of Cyprus; and 2) an EU aid package of 259 
million euros to be spent in the North and dedicated 
primarily to infrastructure development and alignment with EU 
legislation and policies.  Verheugen emphasized the political 
significance of the package, and acknowledged that the EU has 
a special obligation to Turkish Cyprus following its approval 
of the UN reunification plan, which was rejected by the 
South.  In discussions with us, Commission officials have 
said this package represents all that the Commission can do 
for the north. 
 
¶2.  (U) Summary (continued): The aid package should win 
unanimous Council backing, although the means of delivering 
the aid has still to be sorted out.  The trade package is 
more controversial, as Commissioner Verheugen is attempting 
to use a qualified majority vote (QMV) procedure which 
neutralizes the influence of Cyprus and Greece on the 
package.  For this reason the trade proposals are already 
facing stiff opposition from the Greek Cypriots and from 
Greece itself, who argue, despite Verheugen's assurances to 
the contrary, that direct trade with the North will entail 
the tacit recognition of Turkish authorities. Nicosia has 
indicated considerable dissatisfaction with Verheugen's 
QMV-based approach, and has expressed its determination to 
oppose the trade proposals in the European Court of Justice 
(ECJ).  END SUMMARY. 
 
PREFERENTIAL TRADE REGIME 
------------------------- 
 
¶3.  (U) The Commission's proposal would establish direct 
trade between Turkish Cyprus and the EU under a preferential 
regime.  The Commission says that this "should take the form 
of a tariff quota system."   Goods originating in Northern 
Cyprus would have to be labeled as such, and measures would 
be in place  to prevent what the Commission calls "artificial 
trade patterns" (i.e., transshipped goods from Turkey). 
Responsibility for this and for regulating exports in general 
would rest with the Turkish Cypriot Chamber of Commerce. 
Additionally, the Commission proposal sets rules on taxation, 
food and product safety, inspections, and communication 
obligations, which the Turkish Cypriots would have to abide 
by.  Finally, the Commission would allow ports of Northern 
Cyprus, for the first time since 1974, to reopen to 
commercial traffic with the EU. 
 
SUBSTANTIAL AID PACKAGE 
----------------------- 
 
¶4.  (SBU) The Commission has proposed a total package of 259 
million euros for 2004-2006, and the Council has previously 
approved this figure.  The Commission says the money will be 
directed towards aligning Turkish areas with EU regulations 
and law, programs to improve contacts between the North and 
the South, social and economic developments, and 
infrastructure improvements.  Verheugen singled out water 
treatment, tourism, agriculture, and small and medium sized 
enterprises as special areas of interest. 
 
APPROVAL LIKELY, BUT IT'S NEVER EASY 
------------------------------------ 
 
¶5.  (SBU) The Council is likely to approve the Commission's 
aid package, and the money should begin flowing into northern 
Cyprus in the near future.  The idea of providing aid is 
accepted by all in principle.  The real question is the 
degree to which Nicosia will seek to influence allocation 
decisions and methods. Notably, Verheugen said the Commission 
had not decided which delivery mechanism to use.  This is 
significant because the method of distribution promises to be 
a source of debate in the Council, as it was last time the 
Commission's aid proposal was discussed (REF A).  The 
Commission wants to be able to disburse the funds independent 
of the Cyprus government in Nicosia, while the latter wants a 
hand in deciding how the money will be spent.  Whether or not 
the EU will open a liaison office in the North remains an 
open question.  A member of Commissioner Patten's cabinet 
told us that the two most serious options under consideration 
are either an "ad hoc" agency with an office in northern 
Cyprus, or administering the aid via the European Agency for 
Reconstruction based in Thessaloniki, which currently runs 
Commission aid programs for Kosovo, Serbia and Montenegro, 
and Macedonia.  Cyprus is concerned that a EU liaison office 
would imply tacit recognition of the Turkish Cypriot 
authorities.  While the Council (and therefore the Cypriot 
government) will have a say in this decision, the Commission 
expects to be able to implement whichever course it chooses. 
 
¶6. (SBU) The Commission's trade proposal is even more 
controversial.  Verheugen's decision to use Article 133 of 
the EU's treaties as the "legal basis" for the package -- 
which specifies that trade agreements with non-EU states are 
to be approved by qualified majority voting in the Council -- 
means that the measures should be easily passed in Council. 
But it is a highly contentious approach for Cyprus and 
Greece, who argue that Article 133 cannot be used for a 
territory that is legally part of the EU.  The Greek Cypriots 
have voiced their determination to challenge the Commission 
at the ECJ; and it is by no means certain that the Commission 
's proposed regulation would survive the court challenge. 
Our Commission contact pointed out, however, that the new 
trade arrangement should remain in effect while an ECJ ruling 
is pending, and the ECJ "generally takes years to decide 
cases."  He also noted that Greek Cypriot motivations for 
their legal arguments about the applicability of Article 133 
are transparent, since Nicosia would almost certainly block 
the trade package under a consensus procedure, unless the key 
element -- the opening of direct trade between the north and 
the rest of the EU -- were withdrawn. 
 
IMPACT ON TURKISH CANDIDACY 
--------------------------- 
 
¶7. (C) Our Commission contact noted that there was now 
overwhelming pessimism within the EU regarding the prospects 
for progress toward a Cyprus settlement prior to the EU 
Summit's decision in Decemeber on whether to open accession 
negotiations with Turkey.  But he did not expect a continued 
divison of Cyprus to be an obstacle to a favorable decision, 
for all but Nicosia.  (NOTE: As Ref B explains, a settlement 
on Cyprus is a distinct issue from whether Turkey is treating 
the Republic of Cyprus, a full EU member, in a 
non-discriminatory manner.  On that question, we agree with 
Embassy Nicosia's assessment that Nicosia's legal arguments 
enjoy broad EU support.  End Note.)  While he noted that 
Greek PM Karamanlis had "not been doing much to stand up to" 
the Greek Cypriots, Athens was expected to be generally 
supportive of Turkey's candidacy.  But there was far less 
certainty about what Cypriot President Papadopoulos might do. 
 Most worrisome to him was that it appeared there would be no 
domestic political price for Papadopoulos to pay if he 
blocked Turkey solely on the basis of a lack of a 
reunification agreement for the island.  It would lead to the 
risk of a Cypriot government isolated within the EU, but 
stronger at home. 
 
COMMENT 
------- 
 
¶8.  (SBU) From our discussions with EU officials and the 
press reports coming out of Brussels, it is clear that the 
Cyprus government's intransigence over the Commission 
proposals continues to raise hackles in the Commission. 
While Turkish Cypriot authorities continue to benefit from 
post-referendum good will in Brussels, the reality of EU 
institutional functioning limits the ability of the 
Commission to play a strong hand in attempting to reward them 
for their yes vote on the Annan plan.  The Commission is 
hoping to proceed as quickly as possible to improve economic 
conditions for the people of the north, despite fierce 
resistance from Nicosia.  But the Commission is probably at 
the limit of what it will be able to do.  It may even prove 
to be beyond that limit; while Verheugen's effort to channel 
trade through QMV is clever strategy, it is not clear that it 
will in the end be able to survive a challenge at the ECJ. 
 
MCKINLEY