The Failure of Europe’s Feeble Muscle Flexing

The Iranian flag in front of the International Atomic Energy Agency headquarters in Vienna. Credit eonhard Foeger/Reuters
The Iranian flag in front of the International Atomic Energy Agency headquarters in Vienna. Credit eonhard Foeger/Reuters

If you don’t happen to be a foreign policy wonk, you’ve probably never heard of Instex, the Instrument in Support of Trade Exchanges. The company, set up by Germany, France and Britain in January 2019, was supposed to enable trade between Europe and Iran in defiance of United States sanctions. Now, a year later, the first transaction is just about to be processed, according to the German Foreign Office.

All this may sound technical, and, well, wonky. I can already see you wondering: Should I really make the effort to keep reading this column? But it really is worth taking a closer look at Instex and its foibles. Because this instrument — weedy and wonky though it may be — is a prime example of the futility of Europe’s struggle for strategic autonomy from the United States.

If anybody in Berlin needed a reminder of how dangerously impotent Europe is in the face of President Trump’s erratic foreign policy, Jan. 3 should have done the trick. On that day, the Iranian general Qassim Suleimani was assassinated by an American drone strike in Iraq; the fallout pushed the United States and Iran to the brink of war, and once again reduced European leaders to pleading for caution from the sidelines of world politics.

Ever since Mr. Trump withdrew from the Joint Comprehensive Plan of Action in May 2018, European countries have struggled to come up with an appropriate response. The J.C.P.O.A. — also known as the Iran nuclear deal — is an agreement between Iran, the United States, France, Germany, Britain, China, Russia and the European Union. When it signed the deal in 2015, Iran agreed to halt the development of nuclear weapons in return for the end of economic sanctions. Mr. Trump quit the deal three years later, despite reassurances by the International Atomic Energy Agency that Iran did comply with its terms. Soon afterward, the United States reinstated and extended American sanctions on Iran, including so-called secondary sanctions — sanctions that not only prohibit American companies and citizens from trading with Iran, but also affect foreign entities and individuals who do so.

The withdrawal was a major shift in American policy. Instead of the deal’s carrots-and-sticks approach — an approach made in close partnership with Europe — the Trump administration switched to a “maximum pressure” strategy, designed to choke Iran economically. The secondary sanctions also made clear that from the American perspective, Europe was on the wrong side of history and needed to be treated as part of the problem.

To the European signatories of the deal, this shift posed a major strategic problem. Since Mr. Trump announced the American withdrawal, Iran has progressively ramped up its nuclear program; the E.U., including Germany, has pledged to uphold its commitment to trading with Iran in order to retain some leverage over the country. But Europe has had a hard time living up to this promise.

The enormous impact of America’s secondary sanctions comes not just from the market power of the United States, but also from the power of the dollar and America’s capacity to legally or factually control financial transaction systems. “On some level, almost every company has some sort of connection with the U.S.”, said David Jalilvand, a foreign policy expert who runs Orient Matters, a Berlin-based political and economic consultancy specializing in the Middle East. “Even if a company doesn’t operate on the U.S. market, either its bank does, or one of its insurance companies or one of the reinsurance companies backing their insurance companies.” As a consequence, even companies that do not operate on the American market are affected.

One key, then, to Europe obtaining “strategic autonomy” in international relations, is obtaining a capacity for independent financial transactions. Which brings us back to Instex.

Instex — stay with me here! — is part of a barter system that is intended to avoid payments being exchanged directly between European and Iranian companies when they do business with one another, in order to avoid setting off American sanctions. Under this barter system, money doesn’t have to “cross” the invisible line between Europe and Iran: Instex and its Iranian counterpart record the value of shipments from Europe to Iran, and vice versa, and organize the exchange of the appropriate amount of funds among exporters and importers on the same side of the line.

Sound complicated? It is. And while it works on paper, it’s proved extremely hard to realize in the real world. Policymakers in Berlin admit freely today under the condition of anonymity that they had underestimated the technical difficulties.

Instex was first announced by the European Union’s high representative for foreign affairs in September 2018. It was first intended to be set up as an E.U.-institution; then, as a result of legal and political concerns, it transformed into a private company created by only three member states — France, Britain and Germany — to be hosted in Paris and headed by a German. But finding the right personnel to staff Instex proved difficult. The staff had to be composed of people with expertise in both diplomacy and banking, and people willing to take a personal risk, since the United States had threatened to bar both the company and anyone associated with it from the American financial system — which could even extend to having private bank accounts shut down.

After a lengthy slog, in January 2019, the three countries announced that Instex had come into existence. At a meeting of the E.U.’s foreign ministers in Bucharest, Romania, that month, the German foreign minister, Heiko Maas, even tried, boldly, to flex some muscle: “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,” he said. A year later, with Instex poised to process its first transaction, Europe’s great moment of defying the United States approach to Iran seems to have finally arrived.

But has it really?

When compared to Mr. Maas’s strong rhetoric in Bucharest, the sound emanating from German foreign policy circles today is rather mealy-mouthed. The first transaction is said to be a “test case.” German officials have declined to name the exact amount, but say it is “less than a million” euros. They like to stress that everything about it is entirely legal and in accordance with the American sanctions regime: The first trade deal operated through Instex is a shipment of medical goods produced by a German company.

Still, the exporting company’s name has been treated like a state secret — as are the names of the banks involved, for fear they might become the targets of American wrath. Also, there have been no Iranian imports to the E.U. in return, as laid out in the original concept of the barter system. The amount due for the shipment has been provided by Instex itself.

Get through all that? Here’s the tl;dr version: Under constant American diplomatic pressure and threats, Instex has gone from being promoted as the linchpin of an independent European foreign policy to a company sending less than a million euros’ worth of humanitarian aid to Iran in half-secrecy. The once-defiant posture — Europe proudly standing up to a bully — is long gone.

This was roughly the situation when Mr. Trump ordered a death sentence for Mr. Suleimani in January, causing the world, and not least Europeans, to hold their breath for several weeks in fear of a hot war in the Middle East. On the surface, the crisis did not influence Europe’s strategy of management and control. France, Britain and Germany have triggered the nuclear deal’s dispute resolution mechanism; Germany hopes to intensify regional dialogue, leveraging mounting concerns with Donald Trump’s maximum-pressure strategy.

But while on the surface, Europe seems to press on with business as usual, the tectonic plates of trans-Atlantic relations are shifting. For Europe, a direct neighbor of the Middle East, the stakes of Mr. Trump’s risky Iran strategy are extremely high; in January, Europeans learned that the American president would put the Continent’s security interests at risk without batting an eye. This, as well as the bitter lessons learned from the Instex experiment, illustrate once again how hard it is to run an independent foreign policy in a dollar world in which the United States is weaponizing trade. European policymakers have been left with both a sense of urgency and a feeling of utter impotence. Not a comfortable pairing.

At present, it looks like German foreign policymakers are willing to live with it, for lack of better options and for fear of retaliation if they step out of line. They are sustained by a vague hope that Iran’s nuclear program can be contained until the American presidential election. If Donald Trump is re-elected on Nov. 3, however, a tipping point may be reached: The danger of sticking with the United States will outweigh the danger of letting go. Alternate partners have already offered themselves: Both China and Russia have long worked on diminishing their dependency on the dollar and on financial transaction channels dominated by the United States. They have followed Europe’s Instex initiative with great interest, offering to join in. So far, Germany has declined the offer.

Anna Sauerbrey, a contributing opinion writer since 2015, has been an editor and writer at the German daily newspaper Der Tagesspiegel since 2011.

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