05 June 2020

Jacques Delors Centre: The weaponisation of the US financial system: How can Europe respond?

With geopolitical tensions rising, it is possible that the US could impose secondary sanctions on larger EU trading partners. In light of this possibility, this paper explores why secondary sanctions are so effective and offers concrete proposals to counter them.

Sanctions have long been a favourite tool in Washington’s foreign policy arsenal.
Under the Trump administration, however, both the scope and scale of the United
States’ sanctions have grown to an unprecedented level.

Trump has also been uniquely willing to employ such measures unilaterally, often in the face of allies’ objections. Of particular concern to Europe is the US’s use of so-called ‘secondary
sanctions.’ This particularly potent form of economic coercion uses American
control over the global financial system to restrict transactions between third parties
and the target country, effectively extending US jurisdiction well beyond its
borders. Secondary sanctions curtail European firms’ ability to operate in certain
countries and have hampered the EU’s capacity to maintain its international commitments.
In recent years, US secondary sanctions have aggravated Europe and
called into question its ability to conduct a truly autonomous foreign policy.

Such encroachment on European autonomy comes at precisely the time when
Ursula von der Leyen has pledged to lead a “geopolitical” European Commission
aiming for strategic sovereignty. While such talk has raised the hopes of those
who wish to see the EU wield greater power internationally, the gaps between
European ambitions and capabilities remain substantial. The EU’s tepid response
to the United States’ imposition of secondary sanctions on Iran following its withdrawal
from the 2015 Joint Comprehensive Plan of Action (JCPOA) has exposed the
limitations of Europe’s sovereignty.

US sanctions have had the alarming effect of
both jeopardising the deal and preventing the flow of vital supplies into Iran. The
latter problem has become particularly critical in recent months, as Iran’s inability
to import sufficient quantities of medical goods has weakened its capacity to
combat the COVID-19 crisis.

Human rights organisations have attributed some
of the severity of the crisis in Iran to US sanctions, highlighting the humanitarian
consequences of Europe’s inability to successfully counter secondary sanctions.4
In order to fulfil its ambition to become a credible geopolitical player and to
defend its interests and values abroad, it is critical for the EU to be able to withstand
extraterritorial sanctions. This can be accomplished both through defensive
measures – such as creating more effective Blocking Regulations – as well
as deterrent offensive measures, such as an automatically triggered sanctions
response mechanism.

Addressing this gap in Europe’s financial and foreign policy
autonomy would enable the EU to negotiate more effectively, protect its
firms’ financial interests, and face an increasingly aggressive United States with
a more balanced bargaining position. It is also crucial to protect against the possibility
of US secondary sanctions on Russia or China, both of which share deep
economic ties with the EU.

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