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Iran nuclear deal shows Europe is no counterweight to US

A year ago, when the US withdrew from the Joint Comprehensive Plan of Action (JCPOA) and began reimposing sanctions on Iran, European leaders declared their ongoing support for the nuclear deal and promised to do their bit to save it. Now, however, Europe has proved to be incapable or unwilling to take the actions necessary to maintain the agreement, and Iran is running out of patience.

The fundamental bargain behind the JCPOA was that Iran would accept significant restrictions on its nuclear program in exchange for significant sanctions relief. In the last year, the Trump administration has reimposed numerous sanctions on Iran, including secondary sanctions that would impose penalties on foreign companies for doing business with Tehran. As these sanctions have tightened, Iran’s economy has plunged into a deep recession.

A year ago, European leaders criticized the US’ decision to pull out of the JCPOA and promised to maintain economic links with Iran, fundamentally to continue providing at least some economic benefits to Iran for its continued compliance with the JCPOA’s terms. Iran understood that the US decision would necessarily damage its international economic links, but Tehran hoped that Europe, China and Russia would find ways to mitigate the effects. However, it has become clear that US sanctions have been effective in cutting off much of Iran’s trade and financial links with the world and thus raised questions about what Iran now gains from the deal.

European countries took some steps to try to demonstrate support for the JCPOA. The EU created a blocking statute that could potentially impose fines on European companies for complying with specific US sanctions on Iran. However, for companies with interests in America or even that use its financial system for dollar-denominated transactions, the risk of hefty US fines or of being cut off from the US financial system was far greater than potential EU penalties. European companies also could say they were pulling out of deals with Iran due to other factors, such as business risks within Iran, rather than because of sanctions.

Meanwhile, Germany, France and the UK set up a system called INSTEX (Instrument in Support of Trade Exchanges) that would allow Iran to purchase food and humanitarian items, but its overall effect for Iran’s economy would be very limited, and the system still is not operational.

When the JCPOA was first agreed, there was some significant interest on the part of European companies to explore opportunities in a growing market with hydrocarbons wealth that had been economically suppressed for years. However, the constant fear that US sanctions might be reimposed — and then the realization of those fears — held many European companies back or led them to pull out. Political and business risks within Iran did not help matters either.

The problem for Europe is that it has clearly lost leverage. Despite many political statements about the importance of the JCPOA and Europe’s determination to maintain it, European leaders have failed to keep Europe’s side of the bargain and ensure that Iran receives some economic benefits from the JCPOA. The power of the US economy and financial system has very clearly outweighed European business and political interests in Iran.

This led the Iranian government to last week tell Europe and the other JCPOA countries that, if they do not take actions to help allow Iranian oil exports and facilitate Iranian financial transactions within 60 days, then it may take steps that would violate its agreements under the JCPOA. In response, European leaders have condemned “ultimatums,” but their expressions of indignation ring hollow in light of their inability to ensure continued European trade and investment with Iran. British Foreign Secretary Jeremy Hunt recently said that, if Iran ends its compliance with the JCPOA, “then there will be consequences in terms of how European powers react.” But what are those consequences? Europe still has some trade with Iran, so there are some sanctions it could impose; however, given how little business Europe has left with Iran, the effects would be limited.

Europe has demonstrated that it does not have leverage with the Trump administration and has little leverage with Iran. Its inability to defend the JCPOA combines with other developments in recent years — including Brexit, the rise of far-right parties, declines in democracy in Eastern Europe, and more openly expressed xenophobia in response to the refugee crisis — to undermine its soft power on the world stage.

It is possible that, in response to Tehran’s statements this week, Europe will quickly take real steps to preserve the JCPOA, but that is unlikely. Russia lacks the economic might or interest to do so. This largely leaves the ball in China’s court, which may have to weigh its interests in Iran and in economic autonomy against reaching a trade agreement with Washington. The last year has demonstrated the extent of US power over the global economy through the dollar. Concerns about dependence on the dollar have already led a number of countries to try to find ways to develop alternatives, but such moves are difficult and will take time.

Regardless of one’s view on whether the JCPOA is a good or bad deal, its story demonstrates that Europe is not a counterweight to the US. This is likely to undermine Europe’s leverage in any future disagreements with Washington.