Foreign Policy Research Institute A Nation Must Think Before it Acts Iran, the EU, and the USA: The European Search for (Some Degree of) Autonomy
Iran, the EU, and the USA: The European Search for (Some Degree of) Autonomy

Iran, the EU, and the USA: The European Search for (Some Degree of) Autonomy

  • Hajnalka Vincze
  • March 28, 2019
  • Center for the Study of America and the West

The recent effort by France, the United Kingdom, and Germany to create a financial mechanism designed to bypass U.S. extraterritorial sanctions on Iran reveals an increasing need for self-assertion vis-à-vis the United States. For months, Europeans have been seeking ways to preserve the nuclear deal despite President Donald Trump’s decision to withdraw from it. Their efforts have less to do with policy towards Tehran than with positioning the European Union in relation to the U.S., and with visions of Europe itself as an international player.

Not that the Europeans consider the Iran issue unimportant—quite the opposite. It is precisely because the Iranian nuclear agreement is the main, if not the only, success of the EU’s barely existent foreign policy that Europeans could not afford to sacrifice it to their habitual alignment with the United States—at least not without a fight—for fear of losing the little international credibility they might still salvage.

A Snub Second to None

True to the saying that the European Union is an economic giant but a political dwarf, the achievements of the EU’s common foreign policy can be counted on the fingers of one hand—and the most prominent among them is, without question, the nuclear deal with Iran. So much so that the original copy of the agreement is on display in the office of the EU’s chief diplomat. This symbolic value added to economic and geopolitical interests explains why the Europeans could not simply ignore what they consider a blatant humiliation by the United States.

The EU used to be Iran’s top trading partner, a position it lost when sanctions escalated in 2010 and its share of Iran’s foreign trade shrank from 25% to 8%. Since the signing of the Joint Comprehensive Plan of Action (JCPOA) in 2015, which lifted most sanctions in exchange for strict limitations on Iran’s nuclear program, exports to Iran have increased by 70%, and several large European companies have announced significant investments in the energy, computer, and automotive fields. However, the difference in scale between the $20 trillion U.S. and the $330 billion Iranian markets puts in perspective the weight of the economic factor in the Europeans’ decision to stand up to President Trump.

As for geopolitics, Europe is concerned that a resumption of the Iranian nuclear program might lead to widespread destabilization in a region from which, unlike the United States, it is not separated by an ocean. Due to basic geography, Europe is the one on the frontline. It finds worrisome the specter of an Israeli military intervention, which could aggravate the chaos, as well as the prospect of an arms race where Saudi Arabia (and Egypt) would seek their own nuclear bombs. More broadly, Europeans have the impression that by dismantling the agreement with Iran, it is their neighborhood that America risks to ignite.

In addition, Europeans see the JCPOA as a validation of their multilateral approach, presented as the fruit of long years of international diplomacy under mainly European leadership. Indeed, the EU High Representative chairs the talks between Iran, and the P5+1 (the five permanent members of the UN Security Council, plus Germany). For all these reasons—economic, geopolitical, diplomatic—Europe spared no effort to try to convince the American president not to quit the agreement, or—in case of U.S. exit—to at least let the other signatories respect their end of the deal.

For months, French, British and German diplomats made proposal after proposal to harden the common policy towards Iran, without touching the JCPOA. In a last desperate attempt, the French president, on a state visit to Washington, used all his charm and tried to accommodate President Trump’s demands, even going so far as to float the possibility of a “new deal” (actually the same, but re-packaged so as to leave room for negotiation on other areas of concern). Nothing helped. This kind of European subtlety would not dissuade President Trump from quitting a deal he considered “horrible.” As if to twist the knife, he not only withdrew America from the JCPOA, but did it in a way which made it almost impossible for the other signatories to keep it alive.

In announcing the U.S. exit from of the agreement, President Trump opted for the “highest level of economic sanctions,” including those with an extraterritorial scope. These so-called secondary sanctions would penalize any European company that, in accordance with the commitments of its own government but in violation of U.S. laws, continued to trade with Iran. To add insult to injury, U.S. officials have also made multiple public warnings to their European colleagues. National Security Advisor John Bolton said that “the Europeans will see that it’s in their interests to come along with us.” When the first round of sanctions was set to take effect, the President explained in a tweet: “Anyone doing business with Iran will NOT do business with the United States.” A month later he remarked: “I think the Europeans will behave very nicely. Very nicely. Just watch.”

Not surprisingly, this unilateralist approach was deemed unacceptable by Paris, and also deplored by the other parties. For Europeans, the extraterritoriality of U.S. laws amounts to denying them the right to pursue their own policies on an issue that has become emblematic of their diplomacy. A joint letter signed by France, the UK, Germany, and the EU High Representative called on the U.S. not to undermine the Europeans’ ability to preserve an agreement they consider essential for their security. They “expect that the extraterritorial effects of U.S. secondary sanctions will not be enforced on EU entities and individuals, and the United States will thus respect our political decision.” With no answer from Washington, the only question left to the Europeans was to decide whether they would have the means and the will to enforce their own policy choices.

The Art of Half-Measures

In response to the U.S. decision, Europeans have initially presented an unusually united front. All 28 EU countries agreed to reinstate a common regulation to protect their companies that would continue to trade with Iran, and the largest Member States—with the blessing of the EU Commission—decided to set up a special financial mechanism designed to circumvent U.S. sanctions. Nonetheless, the scope of these measures remains limited, either because the availability of sovereign European means is restricted by systemic vulnerabilities or because the use of existing means remains impeded by Europeans’ stubborn refusal to follow through their own logic.

The first step taken by the EU was the reactivation of a blocking statute from the mid-1990s that forbids European companies to comply with extraterritorial, non-EU laws—if they do, they risk sanctions in Europe. In theory, this is meant to provide a legal shield in case they are prosecuted by the United States. Only it has never worked, as attested by the record fines inflicted by the U.S. on French banks BNP Paribas and Société Générale for violating secondary sanctions on Sudan, Cuba, and Iran. As a result, the companies that the blocking statute is supposed to protect have rather the feeling of being trapped between two sanctions systems. Granted, the EU measure also includes a right to compensation for damages resulting from U.S. sanctions, but does so in an absurd form: since the U.S., as a state entity, benefits from immunity, the losses generated by Washington’s decision might have to be financed from European taxpayers’ money.

Practical solutions do exist, but they would imply assuming a more confrontational posture toward the United States. As noted by an analyst at the European Council on Foreign Relations (ECFR, a semi-official think tank, with many renowned European leaders on its board), “EU officials must tell Trump: If you fine our companies’ assets in the United States, we will reclaim those costs by penalizing U.S. assets in Europe.” Uneasy with such a move, Europeans prefer instead to stick to an ambivalent version of the blocking regulation, without accountability of the U.S. partner and without the threat of that kind of “mirror sanctions.” No wonder these measures sound unconvincing to European companies that choose to stay on the safe side and comply with U.S. law.

Indeed, when a company has assets in the United States, has American citizens on their board, or simply makes dollar-based international transactions, it mechanically falls under the scope of U.S. secondary sanctions. Since European governments did not take reciprocity-driven political measures—such as the threat of counter-sanctions against U.S. assets—in order to obtain an exemption for their companies from extraterritorial U.S. laws, private operators quite understandably do not wish to jump into the unknown. They often play over-compliance, rather than risking exorbitant penalties or exclusion from the lucrative American market.

It is no coincidence that, from the outset, the focus of European efforts was the creation of a payment mechanism detached from the U.S.-controlled financial system. European small and medium-sized enterprises (SMEs) that are not directly exposed to sanctions (because they do not have assets in America, or American shareholders, nor do they do dollar-based transactions) could, in principle, therefore continue to trade with Iran. Except that, in order to do so, they have to go through banks—and banks tend to block transactions for fear of possible U.S. retaliation. The search for a secure financial channel was an eye-opening process for European governments. Serious vulnerabilities emerged, as the European Central Bank, the European Investment Bank, and the central banks of different countries have declined to participate, for fear of damaging their ties with the U.S. and/or losing their ability to operate on the global marketplace.

Hence, the recourse to a specific financial mechanism, called INSTEX (Instrument for Supporting Trade Exchanges) recently set up by France, the United Kingdom, and Germany. Domiciled in Paris, INSTEX is run by a German director and receives funding from the three countries—to present a united front against possible threats from Washington. The mechanism is a sort of payments coordinator for transactions to and from Iran—a closed circuit, designed to protect each one of its elements from U.S. extraterritorial sanctions. Given European propensity to simply yield to U.S. demands, INSTEX is a genuine achievement. However, true to their habitual ambivalence, Europeans have managed to both irritate the United States and not satisfy Iran.

For the moment, the Euro-American clash is theoretical rather than practical, though not any less significant. The statement that, after operationalization, INSTEX will be “focusing initially on the sectors most essential to the Iranian population – such as pharmaceutical, medical devices and agri-food goods” means that, as a former U.S. sanctions official at the Treasury Department noted, “It’s not a ‘circumvention’ of U.S. sanctions, since all this trade is permitted.” This did not prevent Vice President Pence from saying, “It’s an ill-advised step that will only strengthen Iran, weaken the EU and create still more distance between Europe and the United States.” At the same time, the Iranian Foreign Minister reminded the Europeans that INSTEX, in this initial form, fell short of commitments made by the E3 (France, the UK, and Germany): “Europe needs to be willing to get wet if it wants to swim against the dangerous tide of U.S. unilateralism.” The problem is that “getting wet” goes against Europe’s deeply-anchored reflexes.

The Sovereignty Challenge: A Bridge Too Far

Although there was initially a remarkable unanimity among the 28 to “deeply regret” the U.S. withdrawal from the JCPOA and to “remain committed to the continued full and effective implementation of the nuclear deal,” reservations emerge, as we have seen, on how to translate this into actual measures. Admittedly, everyone agrees that since the EU’s credibility is on the line, “something must be done.” Yet, when it comes to whether this “something” should have a real impact—so as to assert European sovereignty—or, conversely, remain at the symbolic level in order not to offend the U.S., Europe’s internal divisions come to the surface.

Whereas the French Minister of Economy declares that “it is time for Europe to move from words to action with regard to economic sovereignty, it is time for us to adopt the same instruments as those available to the United States for defending its economic interests,” Chancellor Merkel, like any self-respecting German leader, remains ambiguous on the subject. One day, she says that “Europe must take its destiny in its own hands.” On other occasions, she strikes a more cautious tone: “This is a serious event, but it is not a reason to call into question the entire trans-Atlantic partnership.” Eastern Member States are unwaveringly on this second line. For the Lithuanian Minister of Foreign Affairs Linas Linkevičius, “Let’s take into account what’s more important” – “We shouldn’t do this at the expense of Euro-Atlantic relations.” According to him, “It’s really not a single voice” in the EU, to which his Polish counterpart added, “Many countries are against a confrontation with the U.S.”

Warsaw’s decision to host an anti-Iran summit initiated by the U.S. (and later renamed “on the Middle East”) did certainly not help to overcome intra-EU divergences. Especially since leaders of EU institutions are, for their part, unequivocal: the respect of JCPOA commitments is deemed strategically crucial well beyond the specific Iranian case. In the words of the EU’s chief diplomat, “We Europeans cannot accept that a foreign power – even our closest friend and ally – makes decisions over our legitimate trade with another country. This is a basic element of sovereignty.” Similarly, the President of the Commission titled his latest speech on the state of the Union, “The hour of European sovereignty.”

Not unrelated to the vulnerabilities revealed during efforts to preserve the Iran deal, Jean-Claude Juncker proposed to make the euro “the instrument of a new, more sovereign Europe.” He went on to say, “It is absurd that Europe pays for 80% of its energy import bill – worth 300 billion euro a year – in U.S. dollar when only roughly 2% of our energy imports come from the United States. It is absurd that European companies buy European planes in dollars instead of euro.” This is an unusual, (almost) “de Gaullian” stance from EU officials. In the same spirit, current French President Emmanuel Macron speaks of a “sovereignty test” for Europe, and his Minister of the Economy warns his European partners against behaving “like vassals.”

Former German ambassador to Washington and the current Director of the Munich Security Conference Wolfgang Ischinger considers that the U.S. decision on Iran is an opportunity for Europe: “It is another dramatic wake-up call for the European Union to finally get a grip on itself. For the European project, I cannot imagine a better motivation than this shock from Trump.” After his failed attempts to influence the American president, Emmanuel Macron also drew a clear lesson: “The question is not whether we can convince the United States of America, it is a great people and a great country, the question is whether the United States of America looks at us as a power with strategic autonomy, that’s the real question that is posed for Europe today.” Except that, as we have seen, European partners do not necessarily wish an answer in the affirmative.

Other Horizons…

Despite the ongoing controversies among European partners, there is consensus on two points: first, the stakes go far beyond the question of Iran; second, the commitment to preserve the nuclear agreement in no way implies complacency or naivety vis-à-vis Tehran. For Europeans, honoring their commitments under the JCPOA raises one crucial issue: their ability to assert their own interests and policy choices, even when they do not coincide with those of their closest ally. Seen from this angle, the (half)-measures taken to outwit U.S. extraterritoriality might mark a significant first step. They could be expanded and adapted for other cases, when and if there might be a policy gap between Europe and the United States.

Finally, the dispute over the nuclear deal is only one, and probably not the most important, element in a context of increasing transatlantic policy divergences. Whether on trade tariffs, NATO, European defense, the INF (Intermediate-Range Nuclear Forces Treaty) or arms purchases, Europeans are confronted with fundamental transatlantic imbalances. Moreover, the internal fragilities of EU Member States add a “democracy factor” to the quest for sovereignty. President Macron underscored this often neglected link: “If we accept that other great powers, including allies, including friends, are in a position to decide for us, our diplomacy, our security, then we are no longer sovereign and we can no longer credibly look at our public opinions, our people by saying to them: we will decide for you, come and vote and choose.” On the Iran issue, Europe has clearly failed to assume full autonomy. But it has at least realized, collectively and publicly, that the problem exists. It is safe to say that there will be other opportunities.