In the words of the former UN Secretary General Kofi Annan, “membership of [politically divided] Cyprus in the European Union coupled with Turkey’s membership aspirations has seriously complicated future peace negotiations on the island.” (Hürriyet, June 16, 2006). This is a rather harsh assessment of EU’s Cyprus policy given the fact that membership in the Union would most likely create the optimal conditions for peace and stability between the Greek and Turkish Cypriots. Yet, EU membership of one side at the expense of the other community, seem to have created more obstacles for peace. This paper provides a critical analysis of EU’s Cyprus policy. It examines: (1) the contradictions between EU’s desire to establish direct economic and trade link with the Turkish Cypriots and EU’s legal framework, (2) assesses agenda setting process in the EU and its implications for relations with the Turkish Cypriots, and (3) provides ad agent-based analysis of the current impasses surrounding (1).