Cyprus should look to Malta for ways to improve its own island economy

The size of Malta’s banking sector in relation to overall GDP is almost identical to Cyprus’ – and yet this nation has followed quite a different economic course.

The way that Iceland, Ireland, even the British Isles, and now Cyprus have all been plunged into financial crisis has raised a question about islands. Is there something about territories surrounded by sea that makes them uniquely disposed to take risks, uniquely vulnerable, or both? Perhaps not. For, in the same Mediterranean that laps the beaches of Cyprus, you can find an exception to disprove the rule. Weigh anchor at Paphos, chase the afternoon sun, and you will eventually reach the mighty walls that protect the Maltese capital, Valletta.

Malta has – so far – been spared the plague that has swept eastwards across Europe, leaving insecurity and impoverishment in its wake. Yet the comparisons between the two islands are striking. It is not just a benevolent climate and a varied Mediterranean landscape they share. As former colonies, they both have a close historical association with Britain – which has left the language and visible traces, such as road patterns, public utilities and red phone boxes.

More recently, their relations with the European Union have also run in close parallel. Both applied to join in 1990. They were both part of the big EU enlargement of 2004 – a fact partly obscured by the attention given to the former East bloc countries that also joined then – and they both joined the eurozone at the start of 2008.

The comparisons go even further when you examine the size and structure of their economies. The contribution of individual sectors – agriculture (around 2 per cent), industry (around 17 per cent) and services (more than 80 per cent) – to overall GDP is remarkably similar, as is overall GDP in proportion to the population. Both countries rely to a large extent on tourism – from Britain and Western Europe, but in recent years also from Russia. Both, quite naturally, have major shipping interests.

What might be seen as the “killer” comparisons, however, relate to the size of their banking sectors in relation to overall GDP – a ratio which, at eight times as large, is almost identical – and their 70 per cent debt to GDP ratio. These considerably less positive similarities help to explain why the governor of Malta’s Central Bank warned earlier this week against drawing any conclusions from these figures.

Malta’s banking sector, said Josef Bonnici, was quite different from that of Cyprus, both in nature and in structure. On the one hand, it was more conservatively – ie more rigorously – regulated. On the other, it was far less exposed to the vagaries of the euro, and specifically to the recent difficulties of the Greek banks.

I cannot vouch for the stability of the banking sector in Malta. But I would submit that, for all their statistical and visual similarities, these two islands – the smallest and third-smallest countries in the EU – have a very different feel from each other, reflecting the divergent political choices they have made over the past 50 years.

Malta has also developed a new strength, teaching English, and it attracts students from all over the world

The Maltese archipelago is culturally homogenous, with its own language and identity. Cyprus is divided against itself. Where Malta has no single patron, leaving aside a perverse one-time flirtation with Libya, Cyprus cannot help looking to Greece – all the more so since Turkey occupied the northern third of the island in 1974.

The rights and wrongs of this dispute can be argued for ever, but the division that resulted – and the continuing failure of both sides either to be reconciled or accept separation – remains corrosive. After the Berlin Wall fell, Nicosia was left as the last divided city in Europe. It can be argued that reunification or divorce should have been a condition of Cyprus’s accession to the EU. But for reasons of wider politics, it was not, and the EU acquired, along with a new member, a much older quarrel.

Attitude is an issue. Where Cyprus habitually accepted the shelter of a patron, be it Greece – or Britain, whose military bases it continues to host – Malta took a different course. The peculiar career (as seen from Britain) of Dom Mintoff – who first sought integration into the UK and, when rebuffed, pursued complete independence – may be regarded in retrospect as having done Malta a great favour in fostering a sense of national unity and responsibility. The closure, at Mintoff’s insistence, of British bases meant that Malta was compelled to rely on its own resources. It also became master of its own destiny.

There can be arguments about how it has fared. It has economic woes. But unemployment is low – half the rate in Cyprus – and the improvements in infrastructure and basic quality of life since EU accession are indisputable. It is has also developed a new strength, teaching English, and it attracts students from all over the world.

Earlier this month, Malta held a general election which Labour won by a landslide after 15 years in opposition. The absence of either alarm or even interest outside Malta in this hard-fought campaign may simply reflect the country’s relative insignificance. But it is also a gauge of how well Malta has established itself as a normal and stable EU country. Dalliance with Libya is long gone. Malta’s political compass points north.

Cyprus feels rougher around the edges. Most building in Malta seems to abide by rules; this is not so in Cyprus – which suggests either less regulation or more corruption. Its recent role as a giant safe deposit box for Russian money has done it few reputational favours, regardless of how much of that money is just awaiting repatriation to Russia as investment. The reliance of the Cypriot banks on so much outside money from one country suggested – rightly or wrongly – a potentially gaping hole in the euro’s defences. It made Cyprus’s financial situation look even less solid than perhaps it was.

The statement from the Governor of Malta’s Central Bank about his country difference from Cyprus might not, in itself, discourage speculation about Malta as the next domino. More convincing might be the way Malta organises its politics and uses its money. Not for the first time in its long history, Malta might offer a useful lesson in how island economies can maximise their advantages and minimise their dangers by at once boosting their defences and wooing the world.