1214 GMT November 15, 2019
US President Donald Trump’s unilateral withdrawal from the 2015 Iran nuclear deal – formally known as the Joint Comprehensive Plan of Action – has put Europe in a bind. Its governments remain committed to economic engagement with Iran as a way to encourage compliance with the JCPOA, which means providing not just humanitarian assistance, but also other goods. Firms supplying these exports, however, risk incurring sanctions from the Trump administration.
For the same reason, European banks are reluctant to provide euros to finance trade with Iran. And US banks, for their part, are prohibited from providing dollars. Collectively, these obstacles constitute a formidable barrier to the sought-after engagement.
In response, France, Germany, and the United Kingdom, the three European signatories to the nuclear deal, have established a mechanism for conducting trade with Iran independent of the United States. That mechanism, the Instrument in Support of Trade Exchanges, or INSTEX, is registered in France and reports to a supervisory board of diplomats from the three countries.
But in the month since its establishment, INSTEX has financed zero trade. It has just a single staff member, the former Commerzbank manager Per Fischer. There is less information than confusion about how it will work.
Fortunately, there is a precedent for the initiative: the European Payments Union (EPU) that operated between 1950 and 1958.
In the wake of World War II, Europe’s currencies couldn’t be converted into dollars or exchanged for one another, owing to the continent’s financial difficulties. As a result, they couldn’t be used to finance or settle international transactions. Nor were there substitutes. In particular, European countries possessed little gold and few dollars with which to make international payments.
In order to trade, European countries therefore had to rely on bilateral agreements. They had to balance their trade country by country, essentially reducing their transactions to barter. This was not an efficient way to reconstruct the continent’s trade and payments, to put it mildly.
By 1950, it had become clear that these difficulties were holding back the recovery of the European economy, prompting 18 European governments to create the EPU. The new organization pooled its members’ trade deficits and surpluses, and, by offsetting the deficits a country incurred with one set of partners against the surpluses it ran with others, enabled Europe to settle its trade multilaterally without having to make its currencies convertible.
The analogy with INSTEX is a direct one. Iran will be able to offset the deficits it runs with one set of European countries using the surpluses it runs with others. It will be able to do so without recourse to dollar credits and without having to make payments via SWIFT, the Society for Worldwide Interbank Financial Telecommunications, through which conventional cross-border settlements are carried out, and which has similarly been threatened with US sanctions.
In addition, the EPU was endowed with $600 million to lend to members running temporary trade deficits with the group as a whole. The EPU Board was understandably concerned that these credits be repaid. When West Germany showed signs in 1950 of exhausting its credits, the Board dispatched a small team of experts to diagnose the problem. It recommended an increase in the German central bank’s interest rate, higher commercial-bank reserve requirements, and a ceiling on credit. With the adoption of these restrictive monetary measures, German trade swung back into balance. The EPU lived to fight another day.
Again, the implications for INSTEX are clear. There is no reason to expect trade between Iran and Europe to balance minute by minute. There will have to be credits to compensate firms exporting to Iran in periods when the country is buying more from Europe than it sells. There will have to be policy oversight and adjustment to insure prompt repayment of those credits.
Before 1950, the US government strongly opposed the creation of the EPU, just as it now strongly opposes INSTEX. The concern then was discrimination: European countries, it was feared, would find it easier to import from one another, but, lacking dollars, would still refuse to import from America. In addition, US officials worried that the EPU would duplicate and undermine the functions of the newly created International Monetary Fund.
At this point, however, the two narratives diverge. With the advent of the Cold War, President Harry S. Truman’s administration and the US Congress recognized the urgency of European reconstruction. To this end, they authorized the EPU’s use of $350 million of Marshall Plan funds.
This time, the US is not about to help Europe with its trade-settlement project, new Cold War or not. But, in contrast to 1950, European governments today are capable of operating this type of mechanism on their own. They have the money. They can manage the clearing. History provides guidance on how to get it done.
The article was published in Project Syndicate.
*Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund.