What Europe Can and Can’t Do to Save the Iran Nuclear Deal

May 14 2019, 1:10 PMMay 14 2019, 2:54 PMMay 14 2019, 1:10 PMMay 14 2019, 2:54 PM

(Bloomberg) -- European countries were key to negotiating the landmark 2015 international accord that restricted Iran’s nuclear program in return for relief from sanctions that had strangled its economy. After U.S. President Donald Trump, an outspoken critic of the deal brokered by his predecessor, pulled the U.S. out in May 2018, European governments vowed to keep the agreement viable. But that’s proved difficult in the face of reinstated U.S. sanctions that are again squeezing the Persian Gulf nation. In May 2019, the Iranians issued Europe an ultimatum: give us the economic relief we signed up for within 60 days or we’ll break the deal. Europe has options, but not very good ones.

1. How was Iran supposed to benefit?

Expectations of economic growth and greater global trade coaxed Iran into the nuclear accord. In return for moderating the country’s nuclear ambitions, President Hassan Rouhani’s government won a rollback of international sanctions. The plan seemed to succeed, at least at first. Iran’s economy rose out of recession on the back of higher crude exports. Overseas construction and oil companies as well as aircraft and car manufacturers like Airbus SE and PSA Peugeot signed early deals. European banks and renewable energy developers were just starting to trickle into Iran when the mood music suddenly changed.

2. Why did that happen?

Even before Trump became president, most American companies still weren’t able to do business with Iran because of U.S. terrorism sanctions that stayed in force. After he took office and began a formal review of the accord, companies began to slow their investments in Iran. When Trump finally ditched the deal and reimposed sanctions, he forced Europeans to choose sides. Companies that continued pursuing Iran’s market of 80 million people risked being frozen out of the much larger U.S. market due to “secondary sanctions” that punish non-U.S. banks, companies and people who do business with Iran. Even trade in allowable goods like humanitarian aid and medicines faltered as suppliers were forced to maneuver a complex bureaucratic maze erected by the U.S. Treasury.

3. How did that affect Iran?

After years of isolation, the country was hoping for a golden moment from renewed global trade. Instead, investment petered out and GDP growth plunged. By the time Trump removed waivers in April that had allowed some countries to continue buying Iranian oil, the country’s currency had lost two-thirds of its value and its economy was headed into a second year of recession. Shutting down Iranian oil exports to key buyers such as China, India and Turkey could plunge its economy into full-blown crisis and set off domestic political aftershocks.

4. What can Europe do now?

Not much. Europe’s main response in the last year has consisted of symbolic gestures, meetings and statements in support of the accord. Policies that could provide the sanctions relief Iran seeks have been slower to develop. The European Union rolled out a new version of its so-called Blocking Statute in August. But those rules, which could allow companies to seek compensation in EU courts for damages arising from sanctions, have yet to to be enforced. Similarly, the EU’s Instrument for Supporting Trade Exchanges, or Instex, was set up to facilitate trade with Iran, but after almost a half year of operation the clearinghouse has yet to process a single transaction. Europe could use Instex to help Iran boost crude sales, or even participate in separate oil-for-goods agreements already negotiated with Russia. However, those steps would require a more assertive bloc ready to cross its biggest trading partner.

5. What can’t Europe do?

The region still hasn’t found a coherent strategy that backs up its rhetoric with policies that make it work. Deep trans-Atlantic economic integration means that policy makers risk a backlash from frustrated businesses that don’t want to choose between America and Iran. The EU’s inchoate military and security infrastructure forces the bloc to rely on the U.S. for much of its defense. Perceived threats from a revanchist Russia and rising China divide the bloc along geographic and economic lines. Taken altogether, the EU is showing that it’s incapable of mustering the cohesion needed to counter its biggest ally.

6. What does this mean for Iran?

Following Rouhani’s May 8 ultimatum and at current trajectories, Iranian stockpiles of nuclear material will probably exceed limits set by the accord sometime during the third quarter. EU leaders have signaled such a violation would only ramp up tensions and could yield even more sanctions. It might also spell the end of Iran’s flirtation with western economies and accelerate the shift to new trading partners. China’s Belt and Road Initiative has already tagged Iran as a key partner and Russia has become an important arms supplier to the Tehran government. Unless Iran receives some benefit from cooperating with the existing multilateral system of nations, it might be tempted to join a new one.