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Feb 26, 2019 | 19:19 GMT

7 mins read

Caught in the Middle, Europe Attempts to Balance Hostile U.S.-Iranian Relations

Iran holds its annual Dahe-ye Fajr celebrations in support of the 40th anniversary of the 1979 Islamic Revolution. The 10-day event is a patriotic spectacle that often includes military parades, new missile unveilings and launch tests.
(ATTA KENARE/AFP/Getty)
Highlights
  • Despite the United States' pleas for Europe to follow suit and withdraw from the Joint Comprehensive Plan of Action (JCPOA), the Continent will continue to ensure Iran stays within the framework.
  • Although Washington has a laundry list of issues when it comes to Iran, nuclear proliferation in the Middle East remains the European Union's biggest concern.
  • In an attempt to balance U.S. demands, however, Brussels will subtly increase pressure on Iran in areas outside of the country's nuclear program — namely, activities related to terrorism financing and Tehran's ballistic missile program. 
  • This is a non-commital strategy, though, and will ultimately fail to appease either side, leaving Europe in an even tighter spot between Washington and Tehran. 

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Second-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments over the next quarter.

Last year, U.S. President Donald Trump pulled his country out of the 2015 Iran nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA). Since then, the European Union and the three European powers that also signed the deal — France, the United Kingdom and Germany (known as the E3 bloc) — have scrambled to keep it alive, simultaneously facing mounting pressure from the United States to penalize Iran for its regional behavior. Unlike Washington, however, Europe's primary concern remains nuclear proliferation, meaning Brussels has largely resisted using sanctions to penalize Iran for anything outside of its nuclear program — that is, until now.

Caught between the United States and Iran, Europe's collective strategy in recent months — though not entirely consistent — has been to strike a delicate balance: Increasing pressure on Iran to appease the United States, while also trying to keep Iran in the JCPOA. But by trying to please everyone, Brussels risks pleasing no one. Europe's hesitance to commit fully to either side will likely fall short for Tehran and Washington alike.

The Big Picture

The United States will increase economic pressure on Iran in the coming months, starting with cuts to sanctions waivers for Tehran's oil customers in May. While such measures will hurt the Islamic republic, Iran has worked hard to ensure that Europe and the United States remain divided over the country's perceived threat to regional security. The United States, however, has vigorously campaigned to get the European Union and its most powerful member states to join Washington's side against Iran — leaving Europe once again caught in the middle.

Europe's Resistance to Sanctions 

Compared to the United States, European powers have fundamentally different priorities in dealing with the security threat Iran poses. The country's nuclear program has remained a primary concern for decades, though Tehran has little incentive to use a nuclear weapon against Europe.  The Continent's major fear is that an effective Iranian nuclear weapons program could kickstart nuclear proliferation in the Middle East, with regional rivals matching Tehran step-for-step in developing their own capabilities. Saudi Crown Prince Mohammed bin Salman echoed this fear in a public interview last year when he vocalized his desire to develop a nuclear capability to compete with Iran. 

Typically, Europe has reserved its most effective pressure tactics — namely, oil import embargoes and comprehensive financial sanctions — to deter Iran from continuing its nuclear program. However, since U.S. President Donald Trump took office in 2016, Washington has pressured Europe to take action in response to Iran's ballistic missile program and regional activities as well, which the White House considers to be equally problematic.

But from Europe's standpoint, sanctions geared at impacting Iran's non-nuclear activities aren't worth the security risk of Tehran pulling out of the JCPOA and restarting its nuclear program anyway. While Europe laments the transfer of conventional missiles to Iranian regional allies, such short and medium-range projectiles cannot (for the most part) reach the Continent and are therefore less of a concern. The United States, of course, is beyond the range of such weapons, but it has allies and installations in the Middle East that are.

Unlike the United States, Europe doesn't see Iran as the only culprit for regional conflicts, such as those in Syria and Iraq. And while Brussels seeks some level of harmony in the Middle East, it doesn't see that being achieved by having one power dominate the region. Washington, on the other hand, is far more concerned with the balance of power — and particularly, how any change could undermine its chief regional ally, Saudi Arabia. 

A map showing the range of Iran's ballistic missiles.

Furthermore, Europe has economic incentives for keeping its channels open to Iran, which has one of the most diverse economies in the Middle East, along with a relatively well-educated workforce. By applying the kind of harsh economic sanctions that the United States is demanding, Europe would cut itself off from a large market ripe with trade and investment opportunities. But more important, Iran possesses the second-largest natural gas reserves in the world, behind Russia. This means that should Iran ever become a magnet for energy sector investment, it would be one of the only non-neighboring countries that could significantly offset Europe's current dependency on Russian gas — a problem Europe has sought to tackle by diversifying its core gas supply.

Testing the Waters 

Despite its resistance to economic sanctions against Iran, Europe has recently begun to shift its approach to deal with U.S. demands. Over the past six months, Germany, the United Kingdom and France — as well as the European Union at-large — have started to incrementally increase pressure against Iran in other ways, while trying to maintain Iran's adherence to the JCPOA.

In January 2019, the so-called E3 bloc (France, the United Kingdom and Germany) launched a payment mechanism known as the Instrument in Support of Trade Exchanges (INSTEX), which is designed to help facilitate financial transactions for humanitarian trade. However, to establish the payment channel, the E3 countries attached two critical conditions intended to appease the United States: 

The first calls for Iran to enter a formal dialogue over its ballistic missile program. While Tehran maintains that it has no intention to develop missiles with a range beyond 2,000 kilometers, it has declined to engage in talks over the issue. 

The second condition calls for Iran to fully implement its action plan with the global Financial Action Task Force (FATF). Tehran launched the action plan in 2016 as an attempt to convince the international task force to take Iran off its "blacklist" of countries that enable money laundering and terrorism financing. Iran hopes that by bringing its financial sector up to the FATF's international standards, it can build confidence and attract international investment.

But with the United States withdrawing from the JCPOA and enacting severe economic sanctions, many Iranians are concerned that adherence to the FATF action plan will limit their country's ability to support its regional allies such as Hezbollah and Hamas — and as a result, Tehran has yet to fully implement the plan. However, the E3 countries will likely only allow Iranian banks that meet (or nearly meet) FATF standards to be involved with INSTEX, seeing compliance as a reasonable way to try to combat Iran's regional strategy.

Europe's Iran strategy will continue to focus on keeping the fragile JCPOA alive for as long as possible — or at least until another, more amenable U.S. president takes office.

Meanwhile, the European Union has prepared new, narrower sanctions that could be used against Tehran in an effort to appease Washington. Such measures include expanding formal sanctions to target individuals and entities involved in Iran's ballistic missile program and finding ways to curtail Tehran's support of regional actors accused of conducting terrorist attacks. Practically, new sanctions would entail asset freezes and travel bans, as well as barring European financial institutions from transacting with specific Iranian entities. While Tehran might complain, it has become accustomed to these types of challenges. And such measures would not be nearly as threatening as broader sanctions targeting Iran's financial or energy sector. 
 
Yet, any enhanced European sanctions against Iran will almost certainly leave the United States wanting more. And while Washington continues to demand an increasingly forceful strategy against Iran, Tehran will likely reject the conditions placed on the E3's INSTEX mechanism — which it has already criticized — and demand that the instrument be quickly expanded to include goods beyond humanitarian trade. 
 
For now, a new dialogue between the United States and Iran is inevitable. Europe's Iran strategy will continue to focus on keeping the fragile JCPOA alive for as long as possible — or at least until another, more amenable U.S. president takes office. But with this strategy, Europe risks further angering its most powerful ally, the United States, and making its biggest fear come true by having Iran walk away from the JCPOA for good. In the meantime, however, Europe will simply hope for the best and seek to contain any fallout. 

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