International Relations

The EU and the USA are headed for a fight over Iran sanctions

One that may cost Washington its financial hegemony

Ten months have passed since the United States decided to unilaterally pull out of the nuclear deal it had brokered with Iran and other major powers. Under the Joint Comprehensive Plan of Action, Iran had agreed to give up its quest to develop nuclear weapons, in exchange for an end to painful economic sanctions and a return to normality. Shortly after the pull-out, the Trump administration reinstated these sanctions, seeking once again to isolate Iran from the world economy.

In pursuing this course, Trump was satisfying a popular demand for unilateral decisions, as well as widespread dissatisfaction with the terms of the deal at home. As with many other policy fields in which Washington is currently trying to go its own way, however, it soon discovered that things are not so simple. The new sanction regime introduced by the United States punishes more than just American companies: it threatens European firms as well. The EU, which is trying to keep the nuclear deal alive, has not taken kindly to this economic confrontation. This has given the Iran sanctions row a whole new dimension: Europe and the United States built the structures of international finance together. Under the weight of this standoff, they now risk to unravel.

Preventing Nuclear Proliferation

The Joint Comprehensive Plan of Action is an agreement of historic proportions: it bears the signature of the five permanent members of the U.N. Security Council (the United States, Russia, China, the United Kingdom, and France) as well as Germany, the European Union, and Iran. In spite of its grand nature and the lofty names behind it, however, the deal was always uneasy.

The transatlantic combination of European soft and American hard power delivered results, but it also exposed the growing divisions between Washington and Brussels. Trump’s pull-out reopened a fissure that many thought had finally been closed. This fault line runs inside America’s security environment – where the Iran deal was in equal parts berated and praised – and across the Atlantic.

Iran Sanctions JCPOA signatures
Signatures on the Joint Comprehensive Plan of Action (JCPOA) document.

However, the American government has more reasons than just domestic appeasement to pursue this course of action. The reinstatement of the Iran sanctions framework is part of a larger strategy, one that Washington labels “maximum pressure“. This strategy seeks to force Iran to halt its development of ballistic missiles, cease support for militant groups in the Middle East, and end its violations on human rights. Trump has been swift to warn Europeans about grave economic consequences, should they wish to circumvent the cordon of Iran sanctions.

Unfortunately, rather than de-escalate the confrontation, this has widened the rift between the two sides of the Atlantic. The European Union remains committed to save the deal. As the two allies grow further apart, the United States’ capability to exert financial pressure on Iran has weakened.

Weaponised Interdependence

The United States have been incredibly effective at using their financial muscle as a way to exert pressure on other countries. Pressure is applied not only directly, for example through restrictions on access to the American market – but also indirectly. The sanctions placed on Iran are a prime example of the latter. Non-US firms doing business with Iran are penalised not just with exclusion from the American market, but from international finance as well.

Moreover, this system of “secondary” sanctions can exclude not just firms, but also entire countries, from access to financial markets. As has been recently argued, this strategy has allowed the United States to effectively multiply its economic might.

There are two key factors that give the United States this unparalleled ability to exert pressure on other countries through secondary sanctions. The first is the dollar clearing system: most financial transactions of some significance are conducted in dollars. The second is SWIFT – an international banking transfer system. Without access to SWIFT, obtaining information about international financial transactions becomes next to impossible, even for banks.

Trump Iran Sanctions
President Donald J. Trump delivers remarks on the Iran Strategy in the Diplomatic Reception Room at the White House, Friday, October 13, 2017. In Washington, D.C. (Official White House Photo by D. Myles Cullen)

Europe has played a significant supporting role in both of these developments. The UK in particular has assisted in the international prominence of the dollar by providing eurodollars to the financial market for the entirety of the Cold War. The SWIFT system is based in Belgium, although it’s heavily influenced by the United States. During the Cold War, both sides of the Atlantic generally saw eye to eye on the subject.

The birth of the EU has changed the equation somewhat. The Union is the only polity other than the United States with the sheer size, regulatory tools, and economic clout to influence international finance to some degree. Nevertheless, American and European policies on the subject remained well coordinated: it was their joint action that allowed for an effective isolation of Iran in the first place, and their joint push that made the deal possible.

Iran Sanctions: The European Alternative

The American pull-out from the Iran deal upended years of policy coordination. Trump’s administration has gambled on its ability to keep influencing the international system even without European support. Indeed, that the same tools can be used to force European countries in line if they persist in their efforts to save the Iran nuclear deal.

This assumption is not completely groundless. Under American pressure – and against European wishes – SWIFT has effectively been forced to isolate Iran from access to the world market once more. Additionally, the dollar clearing system isn’t going anywhere soon. This allows the United States to threaten European banks with punitive measures if they facilitate Iran’s access to the world market. Considering the weakened state of European banks in the wake of the Great Recession, this is no idle threat.

These actions have severely tested the EU’s naturally atlanticist inclinations, and it is no coincidence that calls for an independent EU approach on Iran have intensified. These have come not just from Brussels, but from Member States like Germany and France as well.

On the back of this support, the EU is tentatively setting up a Special Purpose Vehicle which would allow payments to Iran, bypassing SWIFT and the dollar clearing system. This SPV will initially only allow transactions that involve access to food, medicine, and other humanitarian purchases. The Americans, however, are worried that the system could expand in the future, becoming a rival to SWIFT. The Europeans themselves have acknowledged this possibility, with the German government detailing prospects of future expansion.

Iran Sanctions
EU High Representative Mogherini and Iranian Foreign Minister Zarif Address Reporters Following Negotiations Between P5+1 Member Nations and Iranian Officials About Future of Iran’s Nuclear Program. US State Department photo, Public Domain.

The move has been met with strident opposition from the Trump administration. The decision to co-host a conference on the Iranian threat with Poland is no coincidence, as Washington looks to the more atlanticist European Member States to undermine the EU’s strategy from within. This, however, may not be enough to stem the threat of a SWIFT replacement.

As the American Treasury had already warned under Obama, the risk of overreach is real. Aggressive maneuvers could deprive the United States of its leverage on the international financial market. Antagonising the United States’ main ally in the continued support of this financial architecture is a high-risk strategy. If the SPV develops into a full-fledged alternative to SWIFT, it will offer international actors at least one potential avenue of bypassing secondary American sanctions.

Playing For High Stakes

These are but the opening moves in a standoff where the stakes are high. The creation of an alternative financial structure that bypasses American influence would fatally undermine the US’ ability to exert financial pressure worldwide. Conversely, however distrustful the EU is of Trump’s motives, it is still highly dependent on the United States for military security, and as has recently become apparent, its intelligence services are inadequate and critically reliant on American intelligence.

The European banking system is also considerably weaker than the American one, and largely entangled with it. This helps explain Brussels’ caution with the SPV. By keeping it limited to humanitarian transactions, the EU is giving itself a fallback option should the worst come to pass, without fully breaking away from transatlantic finance in the immediate.

When combined with other transatlantic divergences – such as the views on Nord Stream 2 or Trump’s friendliness towards Russia – the standoff over Iran sanctions adds even more uncertainty to an unstable environment. Either way, the outcome is likely to be consequential for the future of the transatlantic alliance, as well as international finance.

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Tullio Pontecorvo

Student of political science and international relations, co-founder of My Country? Europe. Aspiring sci-fi author. Believes shooting aliens in the face to be the ultimate form of gaming.

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