Leonhard Foeger / Reuters Dark clouds are seen over Palais Coburg, the venue for nuclear talks in Vienna, Austria, July 9, 2015.

Can Europe Save the Iran Deal?

Time for It to Consider a Plan B

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On January 12, the administration of Donald Trump bought the United States four additional months to decide whether it would remain in the nuclear deal with Iran. In reissuing the sanctions waivers, the White House held to the agreement’s terms, but used the opportunity to impose new sanctions and to threaten withdrawal from the accord if Congress and Europe failed to amend it by May 12. This approach has injected a high degree of uncertainty over whether the deal, known as the Joint Comprehensive Plan of Action (JCPOA) will survive, meanwhile placing the burden of action on the deal’s other signatories, particularly Europe. There is no need, however, for Europe to give in to Trump’s ultimatum. This waiting period buys it time to encourage the United States to remain in the deal while readying itself for an alternate plan: keeping the accord alive regardless of how Washington acts.

Europe, with which Iran has nearly doubled trade in the past year, arguably holds the key to keeping the deal together. Although it cannot persuade everyone in Washington, it can persuade many of them to stay faithful to U.S. commitments. What Trump has made clear is that for Washington to remain in the deal, Congress and Europe would need to remove or extend what are known as the “sunset clauses,” or expiration dates for certain restrictions on Iranian nuclear activities. (Without them, Iran would otherwise never have agreed to the deal, and the dates are also far enough in the future to buy sufficient time for a follow-on agreement.) Trump is also pushing for UN nuclear inspectors to gain unhindered access to Iran’s military facilities and for sanctions to be slapped onto activities currently not covered by the JCPOA, such as Iran’s ballistic missile program. Doing so, particularly unilaterally, would essentially violate the deal.

In the past three months, European countries have lobbied both the Trump administration and Congress to convince them that a stronger pact cannot be built on the ruins of the existing one, which has been delicately balanced through years of intensive multilateral talks; that the best path to strengthen the deal is to rigorously implement it on both sides and to eventually build on it through engagement; and that destabilizing the nuclear deal distracts from focusing on Iran’s missile program, regional activities, and human rights records.

If Washington refuses to listen, Europe could then move to Plan B: preserving the essence of the deal irrespective of what Washington chooses to do, just as members of the international community have sought to salvage the Paris agreement on climate change, from which the United States has announced its planned withdrawal, and just as Pacific nations have built an alternative trade pact following Trump’s rejection of the Trans Pacific Partnership.

Europe’s determination to protect the deal stems less from economic reasons than from political calculations—the fear that to break it would heighten regional tensions, unleash Iran’s nuclear program, and call into doubt the reliability of multilateral agreements. As a German official recently told me, “Only 0.22 percent of almost one trillion euros in German exports go to Iran. As such, it is unfair to point at German business interests as the ulterior motive behind our support for the JCPOA.”

One way in which European countries could go beyond rhetorical support for the JCPOA is to revive “blocking regulations” in order to evade any U.S. sanctions against Iran that they deem in violation of the accord. The European Union first introduced such legislation in 1996 to free its member countries from having to comply with extraterritorial U.S. sanctions against Iran and Cuba. Combined with a threat to sue the United States at the World Trade Organization, it effectively deterred Washington from enforcing those sanctions for more than a decade. While still on the books, the statute faded away after the EU joined the United States in 2006 in imposing severe sanctions against Iran.

By reintroducing blocking regulations, Europe would make it clear that it will not abide by unwarranted U.S. determinations over the Iranian sanctions, and that it will reimburse European companies for fines and other damages incurred for violating U.S. sanctions. European officials have so far been loath to resort to these measures, which have rarely been enforced and could lead to a transatlantic trade war, if both sides move to penalize one another’s major banks and companies. But the cost of angering Washington in this scenario  is acceptable if it means avoiding a situation where, say, Iran were to resume its nuclear program and the United States or Israel had to then resort to military action to stop it.

Europe could also negotiate a long-term energy partnership or a bilateral investment agreement with Iran, which would send a strong signal of its longstanding commitment to the JCPOA. To overcome the persisting banking bottleneck—caused by fears of U.S. sanctions snapping back in place, the sluggishness of Iran’s outdated banking standards, and the opacity of the Iranian economy—a public European body, such as the European Bank for Reconstruction and Development (EBRD), could help small-to-medium-sized firms conduct the often costly and cumbersome due diligence in Iran to ensure that their local partners are not targeted by the remaining EU or UN sanctions. This would be akin to the role the EBRD played in Eastern Europe after the Soviet Union’s dissolution. In the early 1990s, the EBRD helped the countries of the former Eastern bloc develop their private sectors through market liberalization, banking system reforms, and the creation of proper legal frameworks. The EU is currently considering whether to allow Iran to become a European Investment Bank (EIB) partner, which would make Iran eligible to receive development-related loans from the EU. Europe could expedite this process, thus enabling the EIB to engage in private-sector and infrastructure development in Iran.

To address concerns over the JCPOA’s sunset provisions, Europe could encourage its enrichment consortium, Urenco, to approach Tehran about the building of a multinational uranium enrichment plant in Iran. Increased investment and involvement in Iran’s nuclear program would enable the international community to continue monitoring its development, even after some of the JCPOA’s terms expire. 

Although these measures would send strong signals about Europe’s seriousness in honouring the JCPOA, the economic impact of such moves is less clear. After all, would Europeans banks and companies, when faced with a seemingly obvious choice between the $19 trillion U.S. market and a $400 billion Iranian one, take the risk of doing business with the latter?

That depends. According to an exclusive Crisis Group survey of more than 60 senior managers at multinational companies that are actively pursuing opportunities in Iran, the majority—83 percent—remain jittery about the prospect of the United States reimposing unilateral sanctions and 79 percent have delayed plans to enter the Iranian market since the JCPOA came into force in 2016. It seems that Trump’s decertification of the nuclear deal in October, even though it had no immediate practical consequences, adversely affected future planning of nearly half of the companies that were polled.

Yet interestingly, a majority of respondents—64 percent—believe that the nuclear deal is either “very” or “somewhat likely” to survive even if the United States were to withdraw from it. Some 58 percent of senior executives indicated that “assuming Iran remains committed to the nuclear deal,” Europe’s revitalization of blocking regulations would “positively affect the decision to invest in Iran.” It is important to note that many of the companies represented in the survey conducted compliant business in Iran in the face of past sanctions, and 33 percent did not stop trading with Iran in the period between 2006 and 2015 when multilateral sanctions were at their peak. Executives used a combination of carve outs, licenses, and derisking strategies (such as reducing their footprint in the U.S. market) to protect their ties with Iranian businesses under those conditions.

What this signifies is that with strong support from their governments, at least some companies are willing to ensure a modicum of economic engagement with Iran even if the Trump administration reneges on the nuclear deal. Europe should build on this potential and salvage the JCPOA by proving to Iran that there is a way forward, with or without the United States, and that regardless of Washington’s choices, Tehran would be better off complying with the deal and preserving business ties with Europe than if it were to walk away entirely.

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