Source: Bureau of Economic Analysis; foreign affiliate sales: estimates for 2018; total trade: data for goods and services 2018

The novel coronavirus COVID-19 is currently wreaking havoc on the world economy. Disrupted supply chains are forcing companies to throttle back production. As China was the epicenter of the crisis, headlines thus far have focused on how German and European companies have had to adjust because they are so reliant on deliveries or component production in China.

These stories seem to have reinforced a fairly widespread—yet false—view that China has become Europe’s top commercial partner. Spending time in Germany this year I have been struck by repeated assertions by German government representatives that this is so. Those making such statements usually point to sizable bilateral trade in goods.

There is no doubt that commercial ties with China have become more significant for Germany and Europe. But that does not mean that China is the country most important to the health of the German or European economies.

Reducing complex commercial ties to one metric—trade in goods—ignores the commercial importance of investment links, services, digital connections, innovation ties, and foreign sources of “on-shored” jobs for the European economies. On each of these other metrics, the ties that bind Germany and Europe to the United States are much thicker and far deeper than those with China.

These additional arteries are literally the lifeblood of the transatlantic economy. If COVID-19 chills these connections, the ripple effects on the German and European economies are likely to be far worse than what we have seen thus far from China. On the other hand, if the United States and its European partners are able to avoid additional commercial tensions and actually sustain their deep commercial bonds during this crisis, the overall impact of a COVID-19-induced recession is likely to be much lower.

Half Right, All Wrong

US exports of goods to the EU totaled $337 billion in 2019, up 6 percent from 2018 and more than three times larger than US goods exports to China ($107 billion in 2019). US imports of goods from the EU were even larger, $515 billion in 2019. 2019 figures for trade with China are not yet available, but in 2018 the EU exported €351.2 billion in goods to the US and €210 billion to China. The EU imported €213.4 billion in goods from the US and €395 billion from China. That means that total EU-China trade in goods of €605 billion was roughly €40 billion more than EU-US trade in goods.

Keying in on this single metric, on March 6 Germany’s statistics office, the Statistisches Bundesamt, issued a bald statement that “China was Germany’s largest trading partner in 2019 for the fourth year running.” I have heard many government and industry representatives parrot the same line. Strangely, the professional number-counters only count trade in goods. They omit trade in services—the fastest growing segment of the global economy. In short, Germany’s official statisticians get it only half right, and therefore all wrong. Apparently, one of the best kept secrets in Berlin is how German and European firms actually operate.

The Trade Flows You Can’t See

In 2017, the last year of available data, the EU exported €236 billion in services to the US and €42.6 billion to China. It imported €223 billion from the US and imported €30.2 billion from China. So, in sum, EU services trade with the US was €469 billion compared with only €72.8 billion with China.

Here’s the reality: the US and Europe are the largest services economies in the world. They are each other’s largest services market, and dense transatlantic services linkages mean that the transatlantic services economy is the geo-economic base for the global competitiveness of US and European services companies. Europe accounted for 38 percent of total US services exports and for 42 percent of total US services imports in 2018.

In short, if you put trade in goods and services together, then it is clear that the largest trading partner for Germany and the EU overall is actually the United States. And it has been thus for decades.

And this is just the beginning of the story. Most German and European companies actually prefer to deliver services via their investment ties rather than through exports. Allianz of America provides insurance, DHL Holdings offers courier services, and SAP Americas delivers software services across the United States. Volkswagen, Daimler, and BMW all supplement their US-based manufacturing operations with a range of customer services. In 2018, sales of services by European companies based in the US amounted to $585 billion, more than double European services exports to the US in the same year. Similarly, sales of services by US companies based in Europe of $882 billion were 2.5 times larger than US services exports to Europe. And all of this dwarf the sales that American and European companies are able to make in China, due in part to the many restrictions the Chinese impose on Western companies.

Why Export When You Can Invest?

These numbers highlight an additional reality: trade itself is a misleading benchmark of international commerce. The real backbone of Germany’s international economic standing is investment, not trade. And here again, America is the preferred destination. The US accounted for 62 percent of Europe’s non-European assets around the world in 2018. The total European stock in the US of $3.0 trillion was four times the level of comparable investment from Asia. Germany’s total FDI stock in the US totaled $324 billion in 2018, and German investment flows to the US grew 54 percent in the first three quarters of 2019. China plays a marginal role in comparison.

Europe’s role vis-à-vis the United States is very similar. Europe accounted for about 60 percent ($18 trillion) of total US global assets in 2018. This is more than four times the amount of comparable US investment in the entire Asia-Pacific region. Moreover, Europe’s share of total US FDI is going up, not down—57.5 percent over the past decade. And when US FDI flows to Caribbean offshore financial centers are subtracted from the total, Europe’s share climbs even higher, to almost two-thirds of US direct investment flows.

An inordinate fixation on trade ignores the reality that most German and European companies prefer to deliver goods and services by investing in other countries in order to be close to their customers, rather than sending items across the ocean. Sales by European companies based in the US in 2018, for instance, were more than triple European exports to the United States. Sales by US companies based in Europe, in turn, were roughly one quarter larger than the comparable US sales throughout the entire Asian region. Ford, GE, Amazon, IBM, Hewlett-Packard, 3M, Caterpillar, Goodyear, Honeywell—American companies have a long-established presence in Germany and other European countries, and their sales reflect that. Sales by US companies in Germany alone were over two-thirds larger than combined US sales in Africa and the Middle East.

So, despite the headlines about US-European trade wars, American and European companies also earn their money on each side of the Atlantic, not in China. In 2019, US affiliate income in Europe rose to a record $295 billion and European affiliate income earned in the United States in 2019 was also at a record $140 billion. Over half of the income US companies earn abroad comes from Europe. That is roughly three times more than what US companies earn in all of Asia.

At Home, Abroad

All of these facts run counter to the fashionable narrative that US and European companies prefer China or other low-cost nations to developed markets. The reality is different, for several reasons.

First, investing in Europe or the United States is relatively easy, while investing in China remains difficult because of onerous restrictions on foreign ownership and forced technology transfer rules. Second, growth prospects in China have slowed not only because of the coronavirus but because Beijing has shifted toward more consumption- and service-led growth and away from export- and investment-driven growth. Third, in addition to being two huge markets, the US and Europe are wealthy, which is correlated with highly skilled labor, rising per capita incomes, innovation, and world class R&D infrastructure, among other things. Together the US and Europe account for half of global consumption, and gaining access to wealthy consumers is among the primary reasons why US and European firms invest in each other’s markets.

Deep and thickening transatlantic investment ties contrast starkly with FDI coming to each continent from China. For some years Chinese FDI in both the US and Europe soared from a relatively low base. However, Chinese investment is now plummeting on both continents due to bilateral commercial tensions and tighter US and European scrutiny of such investments. Chinese investment flows to the US declined to approximately $4.5 billion last year, and Chinese FDI in Europe fell by 40 percent to $13.4 billion. Looking at the paucity of deals in the pipeline even before the coronavirus crisis struck in such dramatic fashion, it appears 2020 will be a year of weak Chinese investment in both North America and Europe.

Finally, the transatlantic economy is also the fulcrum of global digital connectivity. North America and Europe generate approximately 75 percent of digital content for internet users worldwide. Transatlantic flows of data continue to be the fastest and largest in the world, accounting for over one-half of Europe’s data flows and about half of US flows. 55 percent more data flows via transatlantic cables than over transpacific routes. In 2018 US exports of digitally-enabled services to Europe were double US digitally-enabled services exports to the entire Asia-Pacific region. Similarly, EU exports of digitally-enabled services to the United States alone were greater than EU exports of such services to all of Asia and Oceania.

Misleading Focus

An inordinate focus on trade in goods is deeply misleading. The health of the German economy and Europe’s international competitiveness is not just dependent on this one particular segment of commerce, but on the many other ways Germany and its European partners are bound to others around the world. A fuller understanding of these forces makes it clear that, despite much talk of de-globalization and de-coupling and siren calls of “America First” or “Europe First,” the United States and Europe remain deeply intertwined and embedded in each other’s markets, and that their respective links with each other—not China—remain the driver of the global economy. To argue otherwise is to miss the forest for the trees.

COVID-19’s hit to European-Chinese commercial connections was simply the first phase of this cascading crisis. A shutdown of transatlantic commercial ties, which are much deeper and wider, would be far more devastating. Now is not the time to exacerbate transatlantic commercial tensions. On the contrary. Ensuring that transatlantic flows of goods, services, and investment are sustained is one of the most important things that can be done right now to mitigate the economic impact of the pandemic.

N.B. This article is based on the author’s and Joseph P. Quinlan’s publication The Transatlantic Economy 2020, which will be released on March 26, 2020.

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Reducing net greenhouse gas emissions to zero is such a daunting task that one is disinclined to think about the side effects of success. But these have to be considered. Ditching fossil fuels will have a dramatic impact on world trade and geopolitics.

In order for the world to limit global warming to two degrees Celsius, global greenhouse gas emissions should reach net zero by around 2085, and emissions should already start declining this year, in 2020. (In the 2010s, they rose at a rate of 1.5 percent annually.)

In the process, oil and gas, the source of most emissions, will become less important as tools of foreign policy. In the past, both importers and exporters have used energy as a foreign policy lever, implementing embargoes or sanctions (OPEC against Western states in 1970s, many states against apartheid South Africa, the P5+1 against Iran), playing pipeline politics (Nord Stream 2), and offering benefits to friends (Russia’s discounted oil deliveries to Belarus).

The New Map of World Power

Alliances built on fossil fuels, e.g. that between the United States and Saudi Arabia, will weaken in a decarbonizing world, according to a major new report from the International Renewable Energy Agency (IRENA). In the eyes of the major powers, smaller petro-states like Azerbaijian will lose relevance. Oil and gas will cease to be at the center of quite so much conflict and disagreement in places like Libya and Iraq, to name just two currently in the headlines.

With the scrambling of alliances come new geographies of trade―electricity is a regionally traded commodity, whereas oil is shipped all around the world. Sources of renewable power are also less geographically concentrated than oil and gas fields, so energy production will become less concentrated in states blessed (or cursed) with hydrocarbon deposits, and strategic oil choke points like the Strait of Hormuz will become less crucial to world trade.

As a report from the Belfer Center at Harvard University points out, there is a risk of political instability for fossil fuel exporters that are unable to maintain government spending and standards of living. Look at Venezuela, where falling oil prices have contributed to the country’s recent economic and social collapse. Or Nigeria, where fossil fuel reserves make up 40 percent of the country’s total assets.

The flip side of this is that today’s energy importers will save money. The EU, for example, expects to significantly reduce the €266 billion it spends annually on importing fossil fuels.

To Zero, To Hero

The EU will likely be the first of the major powers to achieve carbon neutrality, making it an interesting test case. It hopes to decarbonize by 2050.

2050 is 30 years away, not a long time compared to previous energy transitions. These are, as the great energy historian Vaclav Smil has written, “gradual, prolonged affairs”; it tends to take 50 to 75 years for a new resource to capture a large share of the global energy market. Humans used traditional biofuels (mostly wood) and animate energy (horses, oxen, biceps and hamstrings) from the discovery of fire until about 1800, when coal power started to become significant and humans began to enjoy the modern industrial world.

It took coal until 1900 to become the dominant energy source, a position it retained until the 1960s, when oil overtook it. Since then, the major trend has been not the takeover of solar and wind power but rather the rise of natural gas, which is now about as important to world energy as oil and coal. In 2017, low-carbon sources, including all types of renewables and controversial nuclear power, provided only 28 percent of primary energy consumption in the EU. That leaves a lot of fossil fuels to transition away from.

Nevertheless, 30 years is long enough that EU fossil fuel demand will decline gradually. The International Energy Agency (IEA) projects that, if the world undertook a “major transformation” of the energy system to tackle climate change, European oil demand would decline by 61 percent from 2018 to 2040. Even though the IEA tends to underestimate the growth of renewable energy, it appears that Europeans will still be buying loads of oil in 20 years.

Meanwhile, European gas demand is expected to decline by 38 percent from 2018 to 2040, though analysts expect gas imports to actually increase in the short term as domestic production declines and coal power plants are shut down. A great deal of the previous progress towards decarbonization is thanks to the switch from coal to natural gas, which emits about half as much carbon dioxide per unit of released energy as does coal.

The (Slow) Death of the Salesmen

One country’s savings are another’s lost business. What will happen to the EU’s fossil-fuel salesmen?

Russia and Norway sell more hydrocarbons to EU customers than any other countries, and thus have the most to fear from EU decarbonization. It’s a real problem for both; no country could simply shrug off the loss of its biggest customer in its biggest industry. Most Russian gas and oil is sold to the EU, and fossil fuel sales provide about 40 percent of Russian federal budget revenues. Fossil fuels are also the backbone of the Norwegian economy.

Norway is “highly resilient” against decarbonization, according to the IRENA report. Being rich helps: Norway’s sovereign wealth fund has about $200,000 for every person in the country. But Norway is also shoring up its defenses. Bård Lahn, a researcher at the Norwegian climate think tank CICERO, says there is “an increasing awareness that Norway needs to prepare for a decarbonized Europe and reduce its exposure to oil and gas market fluctuations.” A government-appointed commission recently recommended stress-testing the economy against declining fossil fuel demand. But so far, “oil and gas policy focuses on maximizing production and exports. In particular, the Norwegian government and oil industry association has made considerable efforts to persuade Brussels about the advantages of natural gas as a ‘bridge fuel.’”

Russia is less resilient. Tatiana Mitrova, a senior research fellow at the Oxford Institute for Energy Studies, says the country is “not well prepared for decarbonization, especially EU decarbonization.” In fact, most stakeholders regard it as an “existential threat” to Russian hydrocarbon export revenues.

However, Russia is still less exposed than some other petrostates. Andreas Goldthau, a professor at the Willy Brandt School of Public Policy at the University of Erfurt and Associate Fellow at the German Council on Foreign Relations (DGAP), says that this is in part because Russia’s fossil fuels are comparatively cheap to exploit. “Russia has relatively low lifting costs for oil, so it is likely to stay competitive even in a market that is set to turn softer against the backdrop of decreasing demand for hydrocarbons.” Russia is also expanding petrochemical production and diversifying its gas exports, in particular by betting big on China. It recently began shipping gas to its mega-neighbor through the Power of Siberia pipeline, the largest gas project in Russian history.

Can I Interest You in Some Hydrogen?

Even if energy exporters can’t sell as much oil and natural gas to the EU in the future, they won’t just give up on the energy trade. At present, the EU imports 55 percent of its energy. In its 2018 long term climate strategy, the Commission projects that this “energy dependency” figure will fall to 20 percent by 2050. Those 20 percent will still represent a lucrative market.

What will future EU energy trade look like? “Member states decide on their own energy mix,” a Commission spokesperson said, while also pointing out that official EU documents give a pretty good idea of what the remaining imports might be. (The usual caveats about predicting anything 30 years from now apply.)

The 2018 EU strategy assumes some residual imports of fossil fuels in 2050. Much of these fuels will be for industrial use, like the natural gas used as a feedstock by the chemical industry. Some fossil fuels will be imported to power long-distance ships and planes, which are hard to decarbonize. The EU will try to offset these emissions with negative emissions elsewhere.

Some share of future energy imports will be low-carbon. A decarbonizing EU will continue to import biofuels, like wood, or diesel derived from plants, though these will be a small part of overall consumption. More significant is the possibility of importing electricity from countries than can produce cheap renewable power, like the sunny nations of North Africa. With EU support, member states are laying power lines across the Mediterranean to the Maghreb.

Hydrogen is the most promising low-carbon energy source for Norway and Russia to pivot to. According to Goldthau, even a decarbonizing EU will likely keep importing energy from Russia. At first, it would be “blue” hydrogen made from natural gas, where the carbon emissions are stored underground or reused. Eventually it should be “green” hydrogen, made by using renewable electricity to split water molecules into hydrogen and oxygen atoms.

Lahn says that some Norwegian industry actors are getting more interested in hydrogen exports, though it remains “an experimental idea.” One advantage here is that hydrogen could be delivered through existing natural gas infrastructure, and Norway and Russia would have a climate-friendly use case for their large natural gas reserves.

Full of Energy

Humans will still need enormous amounts of energy to get through the day in a decarbonized world. But they will no longer be able to take advantage of all the energy stored in plants and animals that died hundreds of millions of years ago and became oil, coal, or gas through exposure to heat and pressure. (In the end, almost all energy is solar energy.)

Decarbonization will reshape foreign affairs; and yet in some ways the new geopolitics of energy will resemble the old one. There will continue to be major trade in energy, whether hydrogen or electricity or biofuels. There could be new resource curses, not with fossil fuels but with rare earth metals essential for clean energy technologies. New inequities will arise as major powers hoover up clean energy patents. Countries will still have balance-of-payments problems with regard to energy imports.

Of course, this will only happen if humans are able to break the mold of previous energy transitions, not merely adding new fuel sources but breaking their addiction to the old ones, thus avoiding catastrophic climate change. These geopolitical developments would be the side effects of success.

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© REUTERS/Christian Hartmann

“Europe has always been an attractive economic space,” Jean-Claude Juncker, the president of the European Commission, told the European Parliament in his annual State of the European Union speech on Wednesday. “But since last year, I see that our partners all over the world are knocking at our door in order to sign trade agreements with us.”

It was an unambiguous reference to the fact that last year the world’s two greatest champions of free trade, the United States and United Kingdom, turned inward.

US President Donald Trump was elected in November on a protectionist, anti-globalization platform. He has already torn up an almost-completed Asian trade pact – the Trans-Pacific Partnership, or TPP – frozen developments on the Transatlantic Trade and Investment Partnership (TTIP) with Europe, and is in the process of scrapping the North American Free Trade Agreement (NAFTA).

Meanwhile, the UK’s Brexit vote is tearing Britain apart from its biggest trading partner while simultaneously making it nearly impossible to strike new free trade deals around the world. Though British Prime Minister Theresa May has insisted that Brexit will mean more free trade with the UK’s former colonial possessions, the reality is that London is forbidden from even starting such negotiations until it leaves the EU customs union. That will be 2019 at the earliest.

Perhaps then it is no coincidence that in his speech Juncker said he wants to strike a host of new EU free trade deals by 2019. He wants to reach deals with Australia and New Zealand, the UK’s top free trade targets, by that year – and by 2018, Juncker wants the EU to have agreed on new trade deals with the Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay) and Mexico. This would come on top of the free trade deals agreed with Canada and Japan this year.

Popular Resistance

It is clear why the EU27 would want to wrap up these trade deals so rapidly – the bloc can take advantage of the current weakness of London and Washington while it lasts. By 2020, the Anglo-American world may have recovered with a new election in the US and the possible finalization of Brexit. The question remains, though: as much as Juncker might want these deals to close quickly, can he get them?

Just one year ago, people were declaring free trade in Europe dead. The free trade deal with Canada was nearly killed by the renegade Belgian province of Wallonia, whose far-left government sympathized with popular resistance across Europe. The resistance was largely based on opposition to the “investor state dispute resolution mechanism” contained in the pact, which opponents said made governments subservient to corporations.

Exactly one year ago, Canadian Prime Minister Justin Trudeau had to cancel a visit to Brussels at the last minute. He was meant to attend a ceremonial signing, but Wallonia was still blocking the pact. Trudeau lashed out. “If, in a week or two, we see that Europe is unable to sign a progressive trade agreement with a country like Canada, well then with whom will Europe do business in the years to come?” he asked. “In this post-Brexit situation where there are a great many questions about Europe’s usefulness, if Europe cannot manage to sign this agreement, then that sends a very clear message, not just to Europe but to the whole world, that Europe is choosing a path that is not productive for its citizens or the world. And that would be a shame.”

In the end, Wallonia was convinced to relent – largely because the Belgian government promised goodies which had nothing to do with the trade agreement. But the near-death experience prompted some to call the deal the last free trade deal the EU would ever sign. If an agreement with popular Canada was provoking resistance among the European public, surely free trade deals with the likes of the US, Japan, or Australia would never fly.

The election of Donald Trump has changed that thinking, but the fact remains that wariness over free trade still remains among the European public.

And so Juncker had to calm those nerves with his speech. “We are not naïve free traders,” he insisted. “Europe must always defend its strategic interests. This is why today we are proposing a new EU framework for investment screening. If a foreign, state-owned company wants to purchase a European harbor, part of our energy infrastructure or a defense technology firm, this should only happen in transparency, with scrutiny and debate.”

London and Washington would call this protectionism. But this isn’t London and Washington’s world any more. Paris, Berlin, and Rome all welcomed the proposal to give governments a tool to intervene.

“I’ve heard your concerns,” Juncker seemed to be saying, “But I don’t think you want to abandon free trade entirely. So we will do it in a new, more European way. We will not mimic the Anglo-American model of free trade.”

The Wallonia Bypass

But the Commission still needs to find a way to solve the “Wallonia problem,” which spooked potential trade partners, especially Australia. It seemed outlandish that a tiny region could potentially derail a deal that had already been agreed on by all 28 national EU governments. An entity of 3.5 million people was about to unilaterally kill a trade deal supported by the other 509 million. It would be as if the city of San Francisco were able to veto a trade deal between the US and Japan.

Though EU member states give the European Commission exclusive competence to negotiate free trade deals on behalf of the EU, those agreements must then be ratified by the 28 national governments. However, because of a quirk in Belgium’s constitution, all three of its federal regions must agree before the national government can sign off. It is the only EU country in which this is the case.

Today, following the state of the union speech, the European Commission announced a new system of approving free trade deals, that would split them up in a way so as to avoid the need for ratification by every national government.

A recent decision by the European Court of Justice made a distinction between those areas of free trade deals that need national approval and those that do not. The idea is to take the controversial investor-state dispute mechanisms out and subject them to a separate vote by national parliaments. That way, even if that part of the trade deal is rejected, the rest of it will be passed as long as it is approved by the European Parliament.

“We need to make sure not only that we can launch trade negotiations, but also that we can conclude them,” EU trade commissioner Cecilia Malmström told journalists today. The first test cases for this new system will be the agreements with Australia and New Zealand, which will only need approval by the European Parliament in order to take effect. “This is the way we make decisions most of the time in the European Union, and no one has said that is not fair or transparent,” Malmström said.

Brexit Implications

Even if the two-track negotiating method may speed up EU trade deals to the detriment of the UK’s ambitions, there is good news for London in this potential plan.

The British are hoping to work out a post-Brexit trade deal with the EU that would give it access to the single market without its being in the bloc. But the Wallonia veto experience highlighted just how difficult it would be to get such a deal approved.

Any Brexit deal that is seen to be giving privileged access to the British would be extremely unpopular with EU citizens across the bloc. Why should the Brits get special rights? Even if such an arrangement could be approved by the European Parliament, it would still need the assent of 27 national parliaments – and three Belgian regions.

Someone, somewhere, would object. Maybe Wallonia, or maybe tiny Malta, as a final act of revenge against its former colonial overlord. Or maybe Spain, as a threat to wrest Gibraltar from the British. Or maybe France, keen to finally rid the EU of British influence. Under the proposed change, only the European Parliament could veto.

Surely, the main aim of these changes is to quickly give the EU a free trade advantage. But at the same time, they could also have the effect of saving Brexit.

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©REUTERS/Raheb Homavandi/TIMA

There are two points to this story. The first is that Iran has changed significantly since the dismal days of Mahmoud Ahmadinejad. Then, a European visitor to a provincial town like Ardebil – particularly a Persian-speaker like myself – would not have been approached by a local entrepreneur. He would have been shadowed by the plainclothes security forces and shunned by ordinary people; business would have been the last thing on his mind. That this is no longer the case is down to the 2013 election of President Hassan Rouhani and his policies of economic stability and foreign détente. The respect that Rouhani, a tough-minded moderate, commands both inside and outside the country has lessened fears of war and domestic political meltdown, but Iran’s relative serenity has also heightened expectations. Iranians are not content with a diminution of tensions. They want work and prosperity.

This is where the second point comes in. Iranians’ fond belief that Rouhani would usher in a flood of investment has been disabused. Even the recent nuclear deal that Iran and the world powers signed in July in Vienna was a damp squib; red-faced portfolio managers who had predicted a 15 percent surge in stock values on the news had to explain to their investors why the main index of the Tehran stock exchange dropped 5 percent. There is huge Western interest in Iran as an investment opportunity – hardly a surprise, given Iran’s massive hydrocarbon resources, solid infrastructure, and young, educated, upwardly mobile population – but for all the myriad foreign delegations trooping into Tehran these days, sizing up opportunities and testing markets, Iran is still waiting.

A Basket Case

The economy that Rouhani inherited in 2013 was a basket case. Thanks to sanctions, oil revenues had collapsed the previous year and the rial had halved in value; the economy contracted 6.8 percent, and inflation soared toward its mid-2013 peak of 42 percent. Unable to import parts or machinery, factories closed and unemployment rose to an estimated five million. Corruption and populist largesse (billions of dollars were being handed out to compensate families for reductions in energy subsidies) did the rest. The country was close to exploding.

Since then Rouhani has steadied things through fiscal discipline and a diplomatic dividend that was reaped under the interim nuclear agreement of November 2013, which provided for limited sanctions relief and committed the global powers to refraining from additional sanctions. The government’s economic managers and private companies were now able to make plans with the knowledge that outside pressure on the economy would not get worse.

The rial duly stabilized, inflation came down to 14.5 percent in the first quarter of 2015, and growth reached 3.8 percent in the second half of last year. But the economy remained stuck in second gear, with oil exports down from 2.8 million barrels per day (in July 2011) to less than half that amount, and earnings further hit by the drop in oil prices. …

Read the complete article in the Berlin Policy Journal App – November/December 2015 issue.

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