The Cypriot Hydrocarbons and the European Financial Crisis

J. Energy Power Sources Vol. 1, No. 6, 2014, pp. 330-337 Received: August 20, 2014, Published: December 30, 2014 Journal of Energy and Power Sources www.ethanpublishing.com The Cypriot Hydrocarbons and the European Financial Crisis Christina Ioannou1 and Achilles C. Emilianides2 1. Department of European Studies and International Relations, University of Nicosia, Cyprus 2. Department of Law, University of Nicosia, Cyprus Corresponding author: Achilles C. Emilianides (emilianides.a@unic.ac.cy) Abstract: The aim of this paper is to address the significance of the Cypriot hydrocarbons within a European framework, identify the political challenges associated with the exploration of Cypriot hydrocarbons and argue that the Cypriot hydrocarbons, or indeed any credible European policy on hydrocarbons, may be a source of tackling future financial crises, only if the Union aims at further political integration, rather than merely integration at a monetary and technical level. The paper considers the issue within the framework of the 2013 European Parliament (EP) Resolution on the Energy Roadmap 2050 and by revisiting intergovernmentalist analyses of European integration which emphasize the centrality of the nation state in the process of integration. It is suggested that a comprehensive energy policy should be based upon a comprehensive political framework enabling such policy to be applied. The 2013 EP Resolution appropriately acknowledged this inter-relationship between politics, economy and energy and called upon the EU to maintain a high political profile and to identify the notion of common energy solidarity. The case of the Cypriot hydrocarbons is a distinct case where any comprehensive energy policy will remain unfinished, unless it can be applied within the framework of a common political energy policy. Keywords: Hydrocarbons, financial crisis, energy roadmap. 1. Introduction The pillars of EU energy policy are sustainability, security of supply and competitiveness. On 14 March 2013 the European Parliament (EP) adopted a Resolution on the Energy Roadmap 2050, a future with energy (“2012/2103 INI-herewith “the 2013 EP Resolution”). The 2013 EP Resolution was a follow-up to the 2011 Commission Communication (“Energy Roadmap 2050 COM (2011) 885”), and the EP Resolutions of 15 March 2012 (“On a Roadmap for moving to competitive low carbon economy in 2050”) and of 21 November 2012 (“On the industrial, energy and other aspects of shale gas and oil and on environmental impacts of shale gas and shale oil extraction activities”). The 2013 EP Resolution emphasizes that it is in the interests of Member States to reduce their dependency on energy imports with volatile prices and to diversify energy supplies and states the importance of taking into account adequate policies and instruments which might re-industrialize the EU economy. The aim of introducing the Energy Roadmap 2050 was to alleviate uncertainties that lead to tensions amongst states and to decrease market inefficiencies. The 2013 EP Resolution proposes in para. 1: The “adoption, within the spirit of solidarity, of a strategy that allows Member States to cooperate under the Roadmap in a spirit of solidarity—the creation of a European Energy Community”. It further highlights in para. 6: The “importance of the EU's energy policy amidst the economic and financial crisis; emphasizes the role that energy plays in spurring growth and economic competitiveness and creating jobs in the EU”. Understandably, the energy policy of the EU is considered as part of the wider aim to increase the competitiveness of Member State economies on the global market. It is the view of the EP that in order to The Cypriot Hydrocarbons and the European Financial Crisis achieve this goal, Member States should co-operate on the basis of common objectives and that national policies should be co-ordinated, so as to reach, where appropriate, a common “European approach” (para. 14). It is moreover stated that these goals will never be reached, “unless the EU takes its responsibilities and fulfills a key role in the transition” (para. 18). Whereas the financial crisis “has made it more difficult to attract the required investment to finance the transformation of the energy system” (para. 47), the EP argues that the crisis should be used as an opportunity, rather than as a 331 stability” (para. 78). The 2013 EP Resolution further stresses that ‘the solidarity between Member States called for in the EU Treaty should apply both to the daily working and the crisis management of the internal and external energy policy; calls on the Commission to provide a clear definition of “energy solidarity” in order to ensure that it is respected by all Member States” (para. 83). 2. The Cypriot Hydrocarbons and the Energy Roadmap 2050 drawback; an opportunity to “transform the EU model The Mediterranean region is of extreme significance of society towards a highly energy-efficient, fully for energy security purposes, since Egypt, Libya, Syria and Algeria have energy reserves and are hydrocarbon exporters, while countries such as Morocco and Tunisia are significant transit countries. The importance of the Mediterranean countries for the energy policy and security of the EU should not be renewables-based and climate-resilient economy” (para. 23). Within this framework the 2013 EP Resolution underlines the importance of natural gas in the “transformation of the energy system, since it represents a relatively quick and cost-efficient way of reducing reliance on other more polluting fossil fuels; stressing the need to diversify natural gas supply routes to the European Union” (para. 66). It further recognizes the potential of natural gas as “a flexible back-up for balancing variable renewable energy supply alongside electricity storage, interconnection and demand-response” (para. 67). The EP thus stresses that there is “an urgent need to put in place a comprehensive EU policy on oil and gas drilling at sea; believes that emphasis should be put on potential hazards and on the delineation of Exclusive Economic Zones (EEZs) for the Member States concerned and relevant third countries in accordance with the United Nations Convention on the Law of the Sea (UNCLOS), to which all Member States, and the EU as such, are signatories” (para. 77). Recognizing that the granting of licensing rights for drilling and the delineation of EEZ’s may well become a source of friction with third countries, it is considered that “the EU should maintain a high political profile in this respect and seek to preclude international discord; underlines that energy should be used as a motor for peace, environmental integrity, cooperation and underestimated [1]. EU demand for oil and gas is projected to rise within the next few years, whilst the domestic production of EU countries is in general projected to fall. Cyprus thus has the potential in the near future to become a major net energy exporter of oil and gas [2-6]. This would fit within the parameters of the Energy Roadmap 2050 addressed above and would have the potential of enhancing the competitiveness of the Cypriot economy, which was recently hit hard by austerity measures and the unprecedented haircut of bank deposits decided in the Eurogroup meeting on 24-25 March 2013 [7-9]. The emergence of the Republic of Cyprus as an active actor in the exploitation of the energy potential of the Eastern Mediterranean is the result of forging strategic alliances with its neighbouring countries, despite the fact that such countries have competing interests and, sometimes, direct hostility towards one another. As already argued, forming long-term partnerships with Israel and countries like Egypt and Lebanon at the same time is not a simple task, as the major partners of the Republic of Cyprus are at odds with each other [10]. Within the wider context of 332 The Cypriot Hydrocarbons and the European Financial Crisis stressed Arab-Israeli relations, Israel and Lebanon have been formally at war and devoid of diplomatic relations; the 2006 Lebanon war was the culmination of a period of stressed relations which have prevented the two countries from agreeing on a delimitation of their EEZs. The two countries have vowed to uphold their full sovereignty and economic rights over their territorial waters and EEZ and to exploit their natural resources, warning each other that they shall not tolerate any violation of their rights [11]. Whereas Egypt—the other major player in the region—has established diplomatic relations with Israel since 1980, this should not imply that the relations between the two countries are not strained. The Egyptian Revolution of 2011 resulted in a continuous conflict and instability at the Israeli-Egyptian border. The Turkish-Israeli relations are also strained. Whereas Turkey was the first Muslim country to recognize the state of Israel, relations between the two countries deteriorated following the 2008-2009 Gaza War and the 2010 Gaza Flotilla Raid; Turkey downgraded diplomatic ties with Israel on September 2011, recalled its ambassador from Israel and expelled Israel’s ambassador. On the other hand, Turkey has signed a memorandum of understanding with Egypt to improve and enhance military relations and co-operation and to collaborate on the implementation of a natural gas agreement. Not surprisingly, relations between Cyprus and Turkey constitute the most difficult challenge for Cypriot hydrocarbons, as Turkey arbitrarily continues to argue that the Republic of Cyprus is not a sovereign state and that it has no power to sign delimitation agreements with its neighbouring states [12-16]. Within this turbulent framework, the Republic of Cyprus has tried to maintain a sensitive balance with its neighbouring countries concerning the exploration of reserves in the Eastern Mediterranean. The Republic of Cyprus is called upon to act as a mediator and maintain co-operation with countries which continue to have competing interests in the area. A good example is the 2010 increased strategic alliance forged between the Republic of Cyprus and Israel over the exploitation of the reserves. The two countries reached an agreement over their maritime boundaries in December 2010, which was ratified by Cyprus in February 2011. This resulted in protests by Lebanon which argued that the zone defined in the Israel-Cyprus 2010 Agreement, albeit consistent with the 2007 Lebanon-Cyprus Agreement, was inconsistent with the views of Lebanon. The strategic alliance with Israel has been a development of extreme significance, which presupposes however the continuation of the strategic partnership with Egypt and the eventual agreement with Lebanon over the delimitation of the respective maritime boundaries. 3. Lessons from the Monetary Union: Revisiting the Spillover Effect The inability of the EU to effectively tackle and provide solutions to issues pertaining to the financial stability and survival of its member states and citizens is the direct result of an unjustified optimism that monetary union would inevitably lead to enhanced political integration. In order to appreciate the short-sightedness of European technocrats at the time of the creation of the EMU one has to go as far back as the early 1990s and the Treaty of Maastricht. The Treaty laid down the foundations for a monetary union modelled around a European Central Bank (ECB)—in the profound absence of an economic union, in terms of both fiscal and banking union, both of which are deemed to be essential attributes of any sound economic model. Despite the label Economic and Monetary Union (EMU) given to the new project, there was a clear absence of a strictly coordinated economic policy; hence “EMU” ended up being a huge misnomer. The underlying assumption was that economic union (and thus further political integration) would inevitably follow. This rationale is in line with neofunctionalist predictions on European integration, which argue that the latter can be self-sustaining. The theoretical basis The Cypriot Hydrocarbons and the European Financial Crisis for this rests on the concept of spillover (functional and political spillover), which suggests that initial steps towards integration carry a dynamism, which may trigger endogenous economic and political dynamics, that can lead to further cooperation. The underlying assumption was that: “integration within one sector will tend to beget its own impetus and spread to other sectors” [17]. This assumption was fundamentally flawed in the case of the EMU, as this automatic mechanism that could create a spillover from a monetary union to an economic union was seriously lacking. What’s even worse is that the EMU also lacked the basis for an institutional mechanism that could restore economic stability in times of crisis and attract capital investments in times of market uncertainty. The question was how member states, and the system at large, would react when confronted with the first major financial crisis. It is a fact that the experience so far (a few years into the crisis) has shown that the Union is not willing to take steps towards a fiscal union, or a political union at large, but has rather focused on further institutional integration in terms of completing its banking union. When the system was thus put to the test for the very first time, when the first major financial crisis hit the continent, Member States opted to integrate less politically, confirming that the establishment of monetary union does not necessarily lead to political union [18]. This would require both a banking union and a fiscal union. The former entails, at a very minimum, an integrated system of supervision in the form of a single supervisory mechanism for banks, based on a single rulebook; at a maximum, a single resolution mechanism to handle bust banks, funded by levies on the sector itself (even though this is difficult as the EU Treaties provide no base for such mechanism). A fiscal union, on the other hand, entails sacrificing state sovereignty on fiscal management. The latter seems the least likely of the two scenarios and the EU has thus focused on redressing the 333 anomalies and institutional weaknesses emanating from the foundations of the EMU structure. It is however unlikely that technical integration suffices for a comprehensive EU policy. The recent Eurozone crisis has challenged the realities of the ideal of solidarity and has proven a major blow for supporters of a common European idea [19-20]. The recent Eurogroup decision on Cyprus has further confirmed that national interests continue to reign supreme [21-22]. The construction of an EMU lacking a true political union was initially considered as an unqualified success, with statements being nearly euphoric [23]; collapse however soon ensued, not the least due to lack of genuine political solidarity [24-26]. The same could well happen to any attempt to construct a comprehensive energy policy on a technical level, with complete disregard to hard political realities and the need to genuinely achieve solidarity and political co-ordination in external affairs, beyond mere rhetoric. The drafters of the EU have long considered that market economy might properly function by securing a closer economic integration. The EU’s internal market sought to guarantee the free movement of capital, goods, services and people within its Member States; it was considered that a common market and the drive towards economic integration could occur without the necessity of similar progress in political integration. It is argued that this deification of market economy, the view that it might effectively function on its own, irrespective of its political framework, is flawed [27]. Politics and economy are interwoven and a common market may not properly function in the long term, unless there is also a political framework securing its proper growth. 4. Intergovernmentalist European Integration Approaches to The extent to which member states are willing to pursue a political union at the expense of national control over certain policy areas, remains at the heart of the discussion. Intergovernmentalist analyses of 334 The Cypriot Hydrocarbons and the European Financial Crisis European integration can shed light on this, as they emphasize the centrality of the nation state in the process of integration. The focus is on State actors and the dominant concept of national sovereignty and security in interstate relations [28]. Intergovernmentalist theories stress that power is in the hands of member states, and it is their national governments which essentially control the degree and the speed of European integration. Initially proposed by Stanley Hoffmann [29], intergovernmentalism maintains that the potential strengthening of the supranational level through more delegations of power to that level is the result of decisions that are taken at the national governmental level. Hoffmann proposed the logic of diversity, which sets limits to the degree to which the “spillover” process can limit the freedom of action of the governments. “The implications of the logic of diversity are that on vital issues of common interest, losses are not compensated by gains on other issues” [29]. Most notable among IR intergovernmental literature is the work of Moravcsik. Moravcsik [30] historically stretches his research grid from Messina and the conclusion of the Treaties of Rome to the negotiations at Maastricht, looking at the evolution of some key policy areas (notably monetary policy, trade policy and agricultural policy). He tries to assess the factors that brought the treaties about and the dynamics that have driven European integration in the process. The core argument that emerges is that when national interests and preferences converge, then supranational co-operation moves forward. Moravcsik’s liberal intergovernmentalism has three essential elements which combine: (a) a liberal theory of national preference formation; (b) an intergovernmentalistic analysis of interstate negotiation and (c) the assumption of rational state behaviour. Thus the ceding of power to the supranational level involves a set of rational choices by national leaders: “European integration resulted from a series of rational choices made by national leaders who consistently pursued economic interest—primarily the commercial interests of powerful economic producers and secondarily the macroeconomic preferences of ruling governmental coalitions that evolved slowly in response to structural incentives in the global economy. When such interests converged, integration advanced” [30]. In other words, Moravcsik clearly elevates the power of the national level in the process of European integration, arguing that “domestic preference formation” and “interstate bargaining” are driving the process. So if it is to the states’ best interest, then integration will progress. Clearly then, this explicitly points to a nationalistic driver for European integration. This nationalistic driver is also in line with Milward’s [31] history of European integration, which also advances the central role of national governments and national leaders. The process of European integration started in the post-war period because it was to the economic interest of nation states: “The basis of the rescue of the nation-state was an economic one, and it follows that the Europeanization of its rescue had also to be economic” [30]. In the process of Europeanisation then, “the states will make further surrenders of sovereignty if, but only if, they have to in the attempt to survive” [30]. Milward clearly rejects the argument that Europeanisation of policies necessarily usurps national democratic control, as this “treats the abstract concept of national sovereignty as though it were a real form of political machinery” [31]. The notion of national interest driving the European integration process is central in the intergovernmentalist approach. The rationale of Milward’s argument builds on the following puzzle: “How, in a world of such nationally dominated conceptions, apparently justified by the remarkable economic prosperity which attended them, could integration and the surrender of national sovereignty be born? Not as the intellectual counter-current to European nationalism, which it is so often said to represent, but only as a further stage in the reassertion The Cypriot Hydrocarbons and the European Financial Crisis of the role of the nation-state” [31]. The intergovernmentalist assertion is that the process of European integration has a nationalistic element involved, which is driving member states into a supranational surrender of powers, when (and if) it is to their best interest. The intergovernmentalist rationale points to the nationalist intent for integration. This is a distinction that we could explicitly make in the case of a more integrated and comprehensive EU policy on offshore drilling and hydrocarbons, as the argument dominating our discussion will project the idea that, even though the exploration of Cypriot hydrocarbons by the EU or any credible European policy on hydrocarbons could potentially serve as a source of tackling future financial crises, the Union seems to be dwelling on the idea of more integration. Even though the issue seems to have an immediacy that could facilitate the formulation of a common hydrocarbon policy, the question is whether the Union is ready for taking a step leading to political union, which would make a coordinated policy on hydrocarbons much more comprehensive and, essentially, successful. 5. Conclusions The urgent need to put in place a comprehensive EU policy on oil and gas drilling at sea, as envisioned in the 2013 EP Resolution, is relevant in the case of the exploration of Cypriot hydrocarbons. The potential dangers acknowledged by the EP, predominantly the friction between EU Member States and third countries over the delineation of EEZ’s, are applicable in the case of Cyprus. Even more troubling is the fact that Turkey, a country seeking membership in the EU, continues to threaten the Republic of Cyprus and to undermine the effect of its bilateral agreements. Turkey further calls upon all companies and neighbouring countries to refrain from any endeavour that would be contrary to Turkish interests. It suggested that any viable energy policy regarding the exploration of hydrocarbons in Cyprus, or indeed in the Eastern Mediterranean as a 335 whole, is dependent upon political considerations. The 2013 EP Resolution stressed that the EU should maintain a high political profile and should seek to preclude international discord. It further called upon all Member States to apply the principle of solidarity in the daily working and crisis management of the internal and external energy policy, so as to preclude international discord and to address financial problems through the energy roadmap. Whereas these are venerable goals, the reality of the situation is that a European comprehensive energy policy requires more than just technical integration and wishful thinking. The EU remains without a common external policy, especially with regards to the Middle East; the 2013 Syrian crisis is a good example of the EU failing to be a frontrunner in international affairs, because of differing views of its Member States. EU policy towards Turkey, especially with respect to its non-recognition of the Republic of Cyprus, is another obvious example which is of paramount importance in the case of Cypriot hydrocarbons. It is suggested that a comprehensive energy policy should be based upon a comprehensive political framework enabling such policy to be applied. The 2013 EP Resolution appropriately acknowledged this inter-relationship between politics, economy and energy and called upon the EU to maintain a high political profile and to identify the notion of common energy solidarity. The case of the Cypriot hydrocarbons is a distinct case where any comprehensive energy policy will remain unfinished, unless it can be applied within the framework of a common political energy policy. It is therefore suggested that any credible European policy on hydrocarbons may be a source of tackling future financial crises, only if the EU aims at further political integration, rather than merely integration at a monetary and technical level. This might occur only if national actors actually opt to co-operate at the political level, even in the profound absence of formalised increased political integration. The latter approach The Cypriot Hydrocarbons and the European Financial Crisis 336 would, however, continue to remain dependent upon the good will of the Member States. If the liberal depoliticised market ideal has not managed to avoid an unprecedented financial crisis, there is little evidence to suggest that a depoliticised comprehensive energy policy might be more successful in a politically loaded subject-matter, such as the exploration of hydrocarbons and the delineation of EEZ’s. Paipais [31] has argued that: “Greek politicians use the EEZ discourse opportunistically as a tool of diffusing domestic tension and mobilising popular support. Greece may have very good chances to be back on the energy map but not because the country’s largely discredited political elite prematurely invests on a European EEZ. Unless a well-devised and credible European energy plan is put in place including the Mediterranean hydrocarbon reserves within a wider European geopolitical response to the crisis, there are few reasons to be optimistic”. It is therefore suggested that a comprehensive energy policy on hydrocarbons requires more than merely technical integration. The main challenge, however, is how to convince Member States to trust European integration, when the so-called European ideals of solidarity have failed to inspire a comprehensive “European” policy for tackling the financial crisis. References [1] [2] [3] [4] [5] S. Haghighi, Energy Security: The External Legal Relations of the European Union with Major Oil and Gas Supplying Countries, Hart Publishing, Oxford, 2007. A. Emilianides, P. Focaides, The exploration of hydrocarbons in Cyprus: Implications, problems and perspectives, Cyprus and European Law Review 7 (2008) 91-108. S. 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