Persian Gulf

Why Europe hasn’t stood up to US sanctions against Iran

Tensions are high between the US and Iran. There are even murmurs of war. There have already been material casualties in damaged oil tankers and a downed unmanned surveillance plane. Events so far have the appearance of a clash between a series of orchestrated events conducted by various opponents.

On the surface of it key European governments have for the most part vocalised disagreement with the current US government’s policies toward Iran. Despite European reassurance of support for the Iran nuclear deal (aka the JCPOA), US economic sanctions have proved more or less effective. European businesses have largely complied with them, and their governments have done little more than speak against the sanctions.

Side note: The Iran nuclear deal is formally called the Joint Comprehensive Plan of Action (JCPOA). It was signed by Iran, China France, Germany, Russia, the United Kingdom, and the United States, on July 2015. On May 2018, the US unilaterally broke with the deal and progressively introduced sanctions as part of a multi-vector campaign of “maximum pressure” against the Iranian state.

Let’s take the case of Germany where giant firms have said they’re pulling back on business engagement in Iran or with Iranian institutions. These include giants like Allianz (finance), Daimler (automotive), Deutsche Telekom, Siemens (manufacturing), Volkswagen (automotive).

Why are so many European firms and financial institutions refusing to conduct business with Iran? Are the governments of countries like Germany, the UK, and France playing a double game? Or failing to support their own economies and therefore allowing the US to dictate terms? Are they weak? Are they craven? Do they have other plans?

The real story is animated by multiple plots. European leaders are more than helpless victims in the contest between Iran and the US. Countries like Germany have their own set of interests, obligations, limitations and objectives to contend with. These sometimes contradictory currents are further complicated by the international situation of interrelated forces and camps within each major to minor world power carrying out their best attempts at achieving their objectives.

There’s no clear line for any party to follow. All plots run the risk of colliding against the motions of others outside of their national boundaries and even against opposition between a given nation state’s multitude of institutions and political blocs that disagree on both outcomes and best course of action.

For example, there’s evidence that the US is struggling with one such situation. It seems that numerous US military planners, secret service personnel, and political representatives are at odds with one another on the issue of the desirability of war against Iran.

The Washington Post reports that “Concerns about an escalation are particularly pointed at the Pentagon, where the absence of a confirmed secretary has fueled worries that hawks in the White House and State Department could push the military beyond its specific mission of destroying the remnants of the Islamic State in Iraq and Syria, raising the potential for conflict with Iran”.

Meanwhile, European firms are under direct US pressure. Firms are told to make a decision: either do business with the US or with Iran. You can’t have both. European governments have been accused of failing to give businesses adequate political or economic protection. Since the US is preventing many financial transactions to Iranian institutions, European governments also stand accused of failing to provide alternative systems of payments.

Major European governments have ambitions of their own. Their ambitions explains both why they would articulate opposition to US break with the JCPOA and why they would also refuse to carry out any meaningful activity that would counter the US breach and associated sanctions.

Germany, France, the UK, and the European Union are core US allies. This alliance is not one between equals. As then US president Barack Obama put it in a 2014 speech to military cadets, “the United States is and remains the one indispensable nation. That has been true for the century past and it will be true for the century to come”.

This is no empty utterance. It isn’t even purely symbolic or aspirational. It is a statement of fact and a plan for the future. Obama continued in his address to cadets: “the question each of you will face, is not whether America will lead, but how we will lead — not just to secure our peace and prosperity, but also extend peace and prosperity around the globe”.

The US has had worldwide hegemony and intends to extend that into the future, projecting its power and maintaining the status quo of its dominance even in the face of changing global circumstances.

Germany, France, the UK, and other powerful European nation states are core allies in the transatlantic system made up of bilateral and multilateral arrangements. The US has pride of place in this makeup. This means that the US has a significant measure of power over the European states. The alliance is not one of unique friendship. Common cause is wed to the use of compulsion. They have banded together for the benefit of national and international superiority, but they also adhere to a network of hierarchical division structured by persistent economic, military, and political relations.

On the economic front you have such things as enormous trade relations between the US and its junior European partners. US companies hold significant sway and major investments throughout Europe.

In finance the US is number one in the world, in great part thanks the dollar’s unique role as the world’s reserve currency. The dollar is the primary unit of measure to equate equivalences and values in trades made between different countries. This means that the dollar has a central role in the world economy, used as a savings account to store value (via US treasury bonds), and used as a commonly preferred means of exchange between businesses and states.

This is the state of affairs inherited by the governments of today’s world. But US superpower status is being challenged: not only by the rise of China or the occasional efforts of Russia to exhaust US might, but also by the gradual hollowing out and transformation of the very system that has privileged US interest. The US is no longer the world’s producer, and it’s increasingly dependent on but two pillars of its multi-pillar world system: finance and military. The US dominated international financial system is a complex tributary system that sucks rents, free loans, and interests from the economic activity of other countries. The US military is unrivaled in scope and is spread the world over. Both of these pillars, however, are also under threat these days, regionally and globally.

The power afforded to the US thanks to its financial privilege is made plain by its ability to demand and enforce economic sanctions against one country after another. No other state has this capacity. Perhaps some European countries don’t want to comply, but they can’t just refuse to do so. The will to refuse is not enough. They must consider the consequences of defiance, as well as the benefits of maintaining allegiance. Nation states may confederate like a pack of wolves, but this shouldn’t be taken for granted. It takes time to build the systems that bind, and once established, effort must be made to maintain them or adapt them to changing circumstances.

As a former senior economic consultant and current intellectual of note, Tony Norfield, puts it, the “dollar is at the centre of international banking relationships and the US government can restrict who does business in dollars. But other countries also play a part in the global financial network and benefit from the parasitic game”. (From Norfield’s book, The City: London and the Global Power of Finance, Chapter 1)

Corporate, state, and even personal transactions the world over often have to be conducted in dollars. That means they have to pass through a US institution or bank even if the US is not a formal party to the exchange.

The US is clearly in the most advantageous position in this makeup. But it also faces competition from within the very system that grants it such grand privileges. The competition comes even from its core allies in Europe, who try to game the system in order to gain benefits themselves. They’re helped in this regard by the fact that they are positioned as the second tier in the ranking of powers at the operational heart of the ‘rules based system’ that has maintained the US as the medium through which the great part of the world’s economic, financial, and political activities tend to pass.

Norfield also remarks that “The financial system is the means by which the corporations and governments of the rich countries control the world’s resources. This is not to say, however, that they can control the workings of the capitalist world economy. The capitalist market system is beyond control, and capable of bankrupting even its most ardent supporters”.

The regular necessity of transacting in dollars is part of what limits the freedom of European firms and governments. It also empowers them because they are second only to the US in the established economic regime which also has many European institutions embedded as intermediaries and carriers of exchanges and transactions. So, the European powers may wish to tip the balance within the system in their favour but they’d lose a lot if they abandoned it and tried to create a wholly separate and new system.

Who’s to say that a European Union led exchange system would have the same worldwide sway and power as the current system? Theoretically free of the US, the Europeans may be able to freely take the majority share of spoils from a new structure, but the total of spoils may be so small compared to others as to make this a losing scenario. In fact, this is the most likely outcome, putting the breaks on a concerted effort by European states to immediately establish a new and independent financial order.

How could a European financial regime capture the world in its grips when faced by the existing power of the US based system and by the rising status and requirements of a growing China? Notwithstanding that other countries would not automatically sign on to a European project (i.e. India, Russia, Pakistan, Saudi Arabia, Brazil, Argentina, etc.). Furthermore, we shouldn’t assume that US and other states wouldn’t apply their political and military might to further their own aims combining all dimensions of power to influence and compel rivals and friends. You want to swiftly cut the dollar out of international transactions? Then prepare yourself for reprisals.

Therefore, it makes sense for the leaders of Europe’s top powers to keep with the current arrangement while trying to maximise their share of benefits within the very same framework.

The thing is, however, that there is no guarantee that the international economic, political, and juridical regime that holds the US as the primary and ‘western’ Europe as secondary beneficiaries will last in these changing times. Who’s to say that the US dollar will remain the world’s reserve currency in ten years time, or less?

It then makes sense for European states to prepare for this scenario, and use such things as their highly mitigated opposition to US sanctions against Iran as cover for technical experimentation into alternatives.

“We’re making clear that we didn’t just talk about keeping the nuclear deal with Iran alive, but now we’re creating a possibility to conduct business transactions,” said Germany’s foreign affairs minister, Heiko Maas for the January 2019 launch of INSTEX.

INSTEX is supposed to be a payments mechanism for businesses in Europe and Iran to trade with each other and bypass US financial systems. It isn’t operational and is currently mainly an academic exercise on the European side. This serves its purpose, to begin technical analysis of a non-US dependent system and the exploration of such mechanisms to be used at a future date. We shouldn’t however expect this mechanism to become active in the current scenario. Why throw away the existing system that is both known to the Europeans and affords them with significant advantages over most others around the world. At the same time, there’s not enough gain to be made by trading with Iran in exchange for losing access to the US.

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