(CN) – Europe is often described as an economic giant, but a dwarf in the push and shove of world politics. This status is being put to the test once again as tensions escalate between the United States and Iran, leaving the European Union in the middle and potentially unable to salvage the Iran nuclear deal.
The European Union was a key player in negotiations that ended with a landmark agreement in Vienna in 2015 that required Iran to curb its nuclear ambitions in exchange for the lifting of international sanctions.
But the deal is falling apart a year after President Donald Trump pulled out and began imposing crippling sanctions on Iran and any entity that does business with Iran.
Last week, Iran threatened to begin withdrawing from the deal too and to take steps to resume its pursuit of nuclear weapons. Before it does that, though, Iran said it would give the EU, and the other signatories to the deal, China and Russia, 60 days to step up trade with it and ease oil and banking restrictions that have hit its economy.
This leaves it largely up to Europe to salvage a deal it has put so much stock in, and which stands as one of the EU’s few diplomatic achievements on the world stage.
A lot is at stake for Europe as the deal breaks down.
Although European leaders have deep reservations about Iran, they still support building trade with the country and see the nuclear deal as crucial to regional stability, arguing it helps prevent an arms race and the proliferation of nuclear weapons in the Middle East.
Iran’s President Hassan Rouhani also has warned that Iran’s economic troubles could impede his country in fighting drug trafficking and lead to an increase in refugees and terrorists making their way to Europe.
To salvage the deal, France, Germany and Great Britain have crafted a financial mechanism designed to allow European companies to export a limited number of goods to Iran and avoid U.S. sanctions. The trade would allow humanitarian goods, such as medicine and farm equipment, to be exported to Iran outside the U.S.-dominated global financial system. The EU says the first transactions will take place soon.
The goods meant to be traded are, in theory, not subject to sanctions because they are considered humanitarian relief in nature. But the U.S. has been ambiguous about whether it will consider companies and banks engaging in such trade with Iran an infraction of its sanctions, and this ambiguity forced the EU to devise this instrument, known as INSTEX, an acronym for Instrument In Support Of Trade Exchanges.
“Europe has made this their core, symbolic initiative in the face of U.S. withdrawal,” said Sahil Shah, the Iran Project Lead with the European Leadership Network, a London-based think tank, in a telephone interview with Courthouse News.
He called this financial mechanism a novel method to bypass U.S. sanctions. But he said European companies will be extremely wary of conducting business through it for fear of running afoul of U.S. sanctions unless strict compliance processes are put in place.
He doubted that this instrument, on its own, will be enough to make Iran feel compelled to remain within the nuclear deal.
“It will not be adequate,” he said. He said the Iranian government “can’t see it making much of a difference to the multi-faceted economic issues facing Iran, including rising inflation and unemployment.”
He added that Iran is frustrated at how long it has taken Europe to create the mechanism. “It’s unfortunate that so much time has been spent on a mechanism that would not have been necessary if the U.S. had given proper guidance,” Shah said.
Still, he said setting up the financial mechanism is “very important to demonstrate continued commitment” to upholding the deal, especially if it is met with further help by China, Russia and other traditional trading partners with Iran.
Iran’s ability to sell oil, steel, aluminum and other goods would still be restricted by sanctions. In Iran, there is hope that the special trading system can be expanded beyond humanitarian goods.
“If Europe treats this matter with the urgency it requires, there could be creative paths for political brinkmanship that de-escalate the current scenario,” wrote Ellie Geranmayeh, a Middle East expert at the European Council on Foreign Relations
Still, many doubt the financial mechanism will be that effective.
“The European room for maneuver is restrained on two fronts: One is basically the U.S. sanctions and the second is that the Iranian economy is extremely unfriendly to foreign investors,” said Ali Ansari, an Iranian expert at St. Andrews University in Scotland, in a telephone interview with Courthouse News.
He added that if Europe is unable to persuade Iran to stay within the deal, it risks losing credibility.
“It will be seen as a bit of a paper tiger, but that is nothing new,” Ansari said.
The crisis over Iran is giving European leaders new impetus to talk about developing a foreign policy independent from the U.S. Talk of freeing Europe from American dominance – for instance by building up an EU army and doing more trade in the euro currency – is a much-discussed topic in European policy circles.
This week, German Chancellor Angela Merkel spoke about the importance of the EU exerting its interests.
In an interview with Sueddeutsche Zeitung, a Germany newspaper, she said Europe needs to be “forward-looking” and “reposition itself in a changed world” in which some post-World War II certainties no longer hold.
“Germany, France and Britain are taking a different approach from the U.S. on the question of the Iran agreement,” she told the newspaper. “For all our other differences, we even have common interests here with Russia and China.”
But Ansari was doubtful much will change.
“The EU has been making these noises for well over a decade,” he said. “It is largely window dressing.”
The EU’s muscle on the world stage is severely limited because it relies on the military and financial might of the U.S. In the case of Iran, Europe is unlikely to risk damaging its relationship with the U.S.
“The elephant in the room has and continues to be the United States,” Ansari said.
In 2015, the nuclear deal was hailed as a major achievement in diplomacy and an example of the kind of multilateralism that then-President Barack Obama and the EU touted as the best path forward.
Most significantly and symbolically, the deal saw diplomats from the U.S. and Iran, archenemies ever since the 1979 Islamic revolution toppled the U.S.-backed shah, meeting and talking.
After the deal was approved, European companies began to move into the Iranian market and trade picked up. The Iranian economy, too, started to do better as oil exports increased substantially.
But then Trump entered the White House and his “America First” unilateral approach has left European leaders wondering if their chief Western ally can be relied upon to look out for their interests on the world stage.
The Iran crisis is a case in point.
Trump has called the Iran deal the “worst deal ever negotiated.” His administration charges that Iran has only gotten stronger and more belligerent in the Middle East since the deal was signed. Iran is accused of supporting militia groups throughout the region.
A year ago, Trump unilaterally pulled out of the deal and his administration has imposed crippling sanctions on Iran. In the latest aggressive moves by Trump, the U.S. has classified Iran’s Revolutionary Guard Corps as a terrorist organization.
In large part due to the sanctions, Iran’s economy is in a recession with its oil exports falling off dramatically and inflation rising. Oil exports may fall even further due to new U.S. actions.
Hajnalka Vincze, an expert with the U.S.-based Foreign Policy Research Institute, wrote that the EU’s dispute with the U.S. over Iran “is only one, and probably not the most important, element in a context of increasing transatlantic policy divergences.”
She said the U.S. and the EU also are facing off on trade tariffs, funding for NATO, European defense and arms deals. She called them “fundamental transatlantic imbalances.”
“On the Iran issue, Europe has clearly failed to assume full autonomy,” she said. “But it has at least realized, collectively and publicly, that the problem exists.”
(Courthouse News reporter Cain Burdeau is based in the European Union.)