This thesis investigates the European Union (EU) effect on the economic activity across the Green Line in the divided Cyprus between 2004 and 2016. The primary focus is on the development and implementation of the EU's Green Line Regulation (GLR), which regulates and enables such activity from three aspects: movement of goods, services, and persons. In tracing the EU effect, this thesis provides a critical appraisal of the GLR on whether it provides an adequate legal framework for the economic activity in those three aspects and the extent to which it has contributed to the development of economic cooperation between the Turkish Cypriot and Greek Cypriot communities across the divide. The analysis also pays an equal level of attention to the extent to which the EU effect has been mediated by the factors at the domestic level: the roles of legal framework, ethno-politics in political elites, ethno-politics in civil society, and governance. The investigation of this study is pegged in two academic literatures. The first one is the Europeanisation debate, which concerns with the EU effect in the domestic affairs of countries associated with the EU. This thesis borrows three mechanisms of Europeanisation from this debate in order to test the EU effect on the three aspects of economic activity across the divide in Cyprus: i) institutional compliance, ii) change of domestic opportunity structures, iii) cognitive change. The second academic literature is the liberal peace, which it proposes that greater economic interactions and development of economic interdependence between countries facilitate resolution of their conflicts. The insights from this debate is utilised for conceptualising the EU's GLR as a liberal peace project. While Europeanisation is portrayed as a 'process', liberal peace objectives are seen as the 'ultimate destination', which the 'vehicle' of the EU's GLR will drive the island towards it. This thesis argues that the GLR has only achieved a limited success and largely failed to contribute to the development of economic cooperation across the divide in Cyprus. This is mainly because the Europeanisation process have been heavily mediated and negated by the design shortcomings of the GLR as well as the factors at the domestic level, which are inherently linked to the politics of division. In this context, this thesis aspires to make contribution in both empirical and conceptual terms. The in-depth and critical investigation of the GLR as well as of the economic activity across the divide in Cyprus provides a much-needed contribution to the contemporary politics of Cyprus, which has been largely ignored by the existing academic literature. Additionally, the conceptual framework developed in this thesis allows exploring synergies between the theoretical literatures of Europeanisation and liberal peace and combines them with examination of new empirical evidence. This focus captures insights on how Europeanisation can be used as a 'tool' for pursuing liberal peace objectives in contested statehood, beyond what has been researched so far and also provides a blueprint for other similar cases of conflict.