The European Union is angling to save the nuclear agreement with Iran, and it may even have the tools to do so. But it will have to face off against Washington, and the stakes are high.
The Iran nuclear deal, it seems, is dead. With the US’s withdrawal and full reinstatement of comprehensive sanctions, Europe stands to lose more than its diplomatic credibility. European companies will also feel the pressure of US secondary sanctions that seek to impose huge fines on foreign companies through their US subsidiaries, and limit their ability to clear international transactions in US dollars, such as oil trades, if they continue to trade with Iran.
Furthermore, the deal’s failure increases the chance that Iran will reinstate its nuclear program, which could in turn lead to a nuclear arms race in the Middle East, involving countries like Egypt, Turkey, and especially Saudi Arabia.
The promise of investment from Western companies was a major selling point of the deal for Tehran. Iran always emphasized that it would only remain in the deal if it continued to reap the economic benefits of doing business with European companies. After French gas and oil company Total decided last month to stop operations after the US’s withdrawal from the deal, automaker Peugeot announced on Monday that it would halt investments in Iran in order to comply with US law. These business decisions deal a major blow to Europe’s efforts to salvage the JCPOA agreement. Iran also announced on Monday that it would once again increase its nuclear enrichment capacity, though as of yet only for industrial purposes.
So while the EU has announced its commitment to maintain the deal with Iran and protect its economic and security interests, in light of recent developments this will be an almost impossible challenge.
In 2015, the Joint Comprehensive Plan of Action (JCPOA) was celebrated as a symbolic achievement of both EU foreign policy and global cooperation between the E3 (consisting of Germany, France, and the United Kingdom) and the United States, Russia, and China. For the EU, the deal shored up non-proliferation and increased political stability in its Middle Eastern neighborhood. One key characteristic of the JCPOA was that it did not seek to address all the problems Iran causes at once—and there are many problems, from its ballistic missile program to the ongoing support for the Assad regime in Syria and Hezbollah in Lebanon. Instead, the most important issue—halting Iran’s nuclear program—was negotiated against the lifting of economic sanctions.
Of course, this meant that Iran was free to continue its problematic behavior, but it couldn’t trade off nuclear concessions for other parts of the agreement; instead, it had to credibly commit to shutting down its nuclear enrichment program. The IAEA still confirms that Iran is complying with the terms of the JCPOA to today. What’s more, this approach, the thinking went, would allow Western policymakers to use the nuclear agreement as leverage at a later stage to negotiate further concessions on issues such as the ballistic missile program. That was true until the US decided to prematurely and unilaterally exit the pact. Indeed, it would have been possible to reach at least partial agreement on the aggressive list of demands that US Secretary of State Mike Pompeo presented to Iran last week, which included stopping the ballistic missile program and support for terrorists—if the JCPOA was still intact.
A Package for Tehran?
Why is it so hard for the EU to keep the JCPOA intact without the US? At a minimum, this would require presenting an economic and political package attractive to Tehran. Iran’s supreme leader, Ayatollah Ali Khamenei, has laid out three strict conditions for his country’s continued commitment to JCPOA: The protection of Iranian oil sales from US sanctions, European banks safeguarding trade with Iran, and no new restrictions on Iran’s ballistic missile program or its regional activities, including in Iraq and Syria. From a technical perspective, the EU could make some of this work.
For example, the EU, alongside Russia and China, could technically devise mechanisms to guarantee the sale of Iranian oil. Assuming that some of the large European refinery owners will stop purchasing Iranian crude, the EU will need to shore up international buyers who are not exposed to US sanctions, incentivizing and protecting them in order to to guarantee the continuation of Iran’s petroleum exports. These buyers will also have to be prepared to enter non-dollar-denominated contracts to avoid banking bottlenecks.
Iran expects a continuation of its petroleum exports and thus the generation of needed hard currency. Russia would play a key role in this process, as Tehran and Moscow already have trade patterns that rely on the export of Iranian oil in return for Russian imports. Moreover, in the wake of Trump’s decision to pull out of the nuclear deal, Iran and Russia are reportedly considering the use of cryptocurrencies as a means to deal with US economic sanctions that cut off the use of the crucial SWIFT transfer system.
Iran has tested the de-dollarization of its trade in several directions and engaged in its first currency swap with Turkey in April 2018, making it less dependent on the dollar in foreign trade. China could play a crucial role in this regard as well. Not only is it one of the largest recipients of Iranian oil, but Shanghai’s new yuan-denominated crude oil futures could become a means for Iran to sell its oil without relying on the dollar.
The EU has also been preparing steps for safeguarding bilateral trade and trade finance with Iran. The European Commission has decided to launch a trade defense law that bans European companies from complying with the US sanctions against Iran. With neither member states nor the European Parliament expected to stop these efforts, the blocking statute could enter into force on August 5, one day before most extraterritorial US sanctions (except on energy-related trade and investment) take effect. This law could even make possible the tit-for-tat freezing of US assets in Europe for fines levied against European businesses and could ultimately provide a legal basis for lawsuits against the US government itself.
The EU Commission is furthermore looking into allowing the European Investment Bank (EIB) to facilitate European companies’ investment in Iran. This means that the bank could potentially issue loans for companies and hence finance trade. This is necessary because European commercial banks are unlikely to finance trade with Iran for fear of consequences for their business in the United States. However, Iran would have to comply with EIB standards that forbid money laundering, financing terror groups, and tax evasion.
Lastly, European leaders have to be very careful to at least initially and superficially respect the red line of not negotiating limits on ballistic missile program. This might seem to be the least technical and easiest condition to fulfil. But that might only incentivize the US, which insists that the program be stopped to put additional pressure on European countries.
Facing Off with Washington
These rescue measures are technically possible, but that doesn’t necessarily mean they will satisfy Teheran, or that they will even be beneficial for the EU. In reality, Europe would pay a high political price for continuing the JCPOA without the US, even with Beijing’s and Moscow’s backing. The EU’s undermining of US sanctions could trigger a further escalation of the political and economic tensions that have clouded transatlantic relations since the start of Donald Trump’s presidency. The US has ways to hurt Europe and leverage its weak spots.
A case in point is trade. Trump’s tariffs on European steel and aluminum came into effect on June 1, while the US administration is also threatening to tax or stop imports of European cars. This step would not only violate WTO rules but could potentially break the rules-based economic order, as the US is imposing the tariffs on national security grounds that are extremely difficult to challenge at the WTO. If the WTO allows Trump’s tariffs, China, for one, could easily follow the US and start banning foreign products in order to “protect national security.” Europe’s export-dependent economies, Germany in particular, have the most to lose in this situation.
In fact, the EU’s elaborate scheme for circumventing US sanctions might all be for nothing if the US does not adhere to international institutions and practices, but instead throws its political, economic, and military weight around. The impression that Europe is acting against the US’s national security interests might be enough for the Trump administration to invoke unprecedented measures against European countries. For the US president, every escalation by the EU could theoretically be answered with an even bigger threat by the US—and his trump card is the security guarantee that the US extends to Europe via NATO. It is natural that the EU is afraid that Trump will undermine or scale back NATO— doing so could be seen as an invitation by some of the US and EU’s strategic competitors to challenge vulnerable NATO nations. And Trump knows that the EU simply has more to lose. Should the EU engage in this game of chicken with the US, it will almost certainly be the Europeans who blink first.
At the moment, Europe seems unable to find an answer to Trump’s chaotic approach. The US president disrupts international processes and agreements and then passes the matter on to US allies who have more to lose, expecting them to solve it for America’s benefit. If they cannot, repercussions loom. The example here, again, is trade. When negotiating a permanent exemption of the EU from steel and aluminum tariffs in April, Washington demanded far-reaching actions from the EU against China, with whom the US has engaged in a far more dangerous trade conflict than the current transatlantic spat over tariffs.
Europe has to come to terms with its powerlessness in the short-term as the US continues its shift toward unilaterally enforcing US national interests around the world. In the long run, making Europe stronger and more independent—economically and not least militarily—should be the EU’s number one priority. The transatlantic relationship is vital for Europe’s prosperity and security and without alternative. The decision Europe has to make is how to engage with its US ally, not whether to do so. In a way, Europe is putting too much emphasis on Donald Trump as a person.
Indeed, between an emerging China and the nationalization of global politics in the US, the EU’s only option is to negotiate from a position of strength that it does not yet have. For the Iran deal, this means that Europeans have too much to lose to really fight for it; the deal is likely to collapse. Should Iran decide to step up its uranium enrichment capacity and break the limits set out by the JCPOA, European countries should leave no doubt about whose side they are on.