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Europe Holds The Key To Iran

By Ilan Berman
Guardian (London)
June 18, 2008

Officials in Europe are beginning to sound more and more like their American counterparts when it comes to Iran. In the wake of President Bush's trip to Europe, they even appear to be moving towards freezing the assets of Iran's largest bank as a way of signalling their resolve over Tehran's nuclear intransigence.

In recent months, French President Nicolas Sarkozy has warned publicly that a nuclear Iran poses an "unacceptable risk for regional and world stability," and his government has taken the lead in calling for tougher international sanctions against the Islamic republic.

German Chancellor Angela Merkel has made similar noises. "If Iran were to obtain nuclear weapons, it would have disastrous consequences," Merkel told Israel's parliament, the Knesset, during her visit there in March. "We have to prevent this."

In practice, however, Europeans are sending a very different signal. Indeed, recent days have seen the Old Continent deal a body blow to efforts to isolate the Islamic Republic.

On May 29, the Iran-Europe Commercial Bank (IECB) undertook a landmark expansion of its presence in the Gulf when it formally began operations in Tehran. These commercial ties are not new; the IECB has operated on the Iranian island of Kish since 2005, when the Islamic Republic established a free trade zone there. But the German-registered bank's decision to move on to the Iranian mainland is a sign that Europe's policy elite, for all their official bluster, are increasingly willing to go back to business as usual with Iran's ayatollahs.

And the IECB is just the tip of the iceberg. At least five other foreign banks are said to be planning to open their doors in Iran in the near future. Meanwhile, in their effort to counteract possible financial isolation, officials in Tehran are actively courting more. According to Tahmasb Mazaheri, the director of the Central Bank of Iran, the Islamic republic is prepared to offer "special incentives" to foreign private banks, including those in Europe, to entice them to open branches in Iran.

All of which should matter a great deal. When it comes to economic pressure against Iran, Europe is unquestionably the senior partner in the transatlantic alliance. The EU, after all, is Iran's chief commercial partner, accounting for more than a quarter of the Iran's total annual trade with the outside world.

America, meanwhile, has precious little direct leverage of this sort. Twenty-nine years after the Islamic revolution, Washington's trade with Tehran remains minimal – the product of nearly three decades of diplomatic disengagement and economic sanctions. US exports to Iran totalled just $145m last year, and imports from Iran just $173m during the same period.

As a practical matter, therefore, if multilateral economic pressure has a prayer of seriously affecting Iran's march toward the "bomb", Europe will need to be involved.

Despite its considerable oil wealth, Iran is uniquely susceptible to this sort of financial squeeze. Since taking office in 2005, the Iranian government, at the direction of its radical president, Mahmoud Ahmadinejad, has implemented a spectrum of ruinous economic policies, including arbitrary wage and benefit increases, cash infusions to politically popular but unproductive investments, and the imposition of unnaturally low interest rates on Iranian banks.

The results have been predictable; according to a recent report from Iran's official customs agency, total imports into the Islamic Republic rose by nearly 10% between March and November of last year, with staples such as corn, rice and sugar increasingly being acquired from abroad.

Simultaneously, the rising value of the Iranian rial is reportedly making foreign goods cheaper and more competitive, crippling domestic industries and leading to job cuts and bankruptcy for some domestic producers. The national rate of inflation, meanwhile, has rocketed from some 15% last autumn to over 25% today, according to new statistics just released by Iran's central bank. It's no wonder that, back in April, Ahmadinejad's own economy and finance minister, Davoud Danesh Jaafari, termed his government's economic policies to be "unscientific" – a comment for which he was summarily sacked.

All this suggests that, despite the defiant public stance taken by officials in Tehran, coordinated international pressure can amplify Iran's internal economic mismanagement – and, hopefully, help to alter Tehran's atomic calculus. Europe, if it is truly serious about preventing a nuclear Iran, should seize the opportunity and put its money – and financial ties – where it mouth is. For the moment, however, its leaders appear intent on doing exactly the opposite.

Related Categories: Europe; Iran Freedom Initiative; Iran

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