How Europe can defend itself against US economic sanctions

The idea of US senators threatening a German state-owned port with “devastating legal and economic sanctions” was something that seemed unthinkable – until now. But recent developments around the Nord Stream 2 Baltic Sea pipeline (designed to transport Russian gas directly to Germany) have broken yet another taboo in transatlantic relations.

Since December, Europe’s closest partner has been trying hard to prevent the completion of the pipeline, using coercive measures in an attempt to achieve this. The pressure of sanctions and an initial threatening letter led European companies to stop work on the project at the end of 2019.

Now US senators Ted Cruz, Tom Cotton, and Ron Johnson have ratcheted matters up yet further by sending another threatening letter to the operator of Sassnitz port, which serves as a key logistical base for building the pipeline. The Protecting European Energy Security Clarification Act (PEESCA), which is currently making its way through Congress and which Cruz introduced, takes the same line. Cruz and his Republican colleagues are threatening to destroy the port of Sassnitz through financial means. Should PEESCA become law, the United States will have significantly expanded its sanctions on European companies and officials.

How should Germany and Europe deal with the fact that the US is engaging in economic warfare, using weapons that should be directed at enemies, not friends like Germany?

First of all, they must now work hard to prevent the serious precedent of Washington threatening German officials and entrepreneurs – something that could tempt Beijing or other powers to achieve their own geopolitical or economic goals in a similar way. If Germany and Europe do not act against this strategy, it will be an invitation to do so again.

Just a few weeks ago, the Trump administration imposed personal sanctions on International Criminal Court judges investigating possible US war crimes in Afghanistan. In addition, Republicans in Congress have issued a report in Congress in which they call for:

• the exclusion of Russia from the financial service SWIFT, which would mean that Germany would no longer be able to trade with a market that is important for its exports;
• sanctions on European platform the Instrument in Support of Trade Exchanges, which is designed to facilitate legitimate trade with Iran despite US policy;
• secondary sanctions on companies that want to do business with Chinese companies, which the US government, in turn, refers to as “intellectual property thieves”.

It is particularly worrying that, as with the Nord Stream 2 sanctions, these policy ideas come from Congress and not from the White House. Even under Joe Biden as president, this route could lead to further economic coercion against Europe. However, it is not easy to find the right response to US sanctions policy. The US remains an extremely important partner and friend of Europe. An escalation in battles over trade policy must be avoided; it would be in neither Europe’s nor the United States’ interest.

Germany in particular benefits from the fact that Europe, in contrast to much of the rest of the world, does not rely on protectionism but on free and fair trade. Nevertheless, there two ways in which Germany and Europe can defend their interests while respecting their commitment to free trade: by strengthening the resilience of European trade relations to sanctions, and by taking countermeasures against the market distortion and cost caused by secondary sanctions – countermeasures that deter future use of sanctions.

Germany in particular benefits from the fact that Europe, in contrast to much of the rest of the world, does not rely on protectionism but on free and fair trade.

Creating greater resilience in trade relations is a complex task, as the US uses the strength of the world’s reserve currency, the dollar, for geo-economic blackmail. To address this, Europe could set up a public bank alongside the European Investment Bank – one that is ‘too big to sanction’ and does not depend on the dollar, and thus could finance trade with countries such as Russia.

Sanctions such as those threatened by Cruz could potentially then become unthinkable: the US would have to target top European officials directly, and at some point it would no longer be in its interest to disrupt trade in this way. A large number of companies would be key to the effort. Of course, this would be difficult for those with a large US business. But many others would probably use this payment channel if the worst came to the worst.

Moreover, digital currencies could give Europe greater freedom in the medium term, if they are designed to reduce dependency on the US financial system. Even the infrastructure needed, such as servers and encryption, should be completely European – and the European Central Bank could introduce a couple of different payment system infrastructures.

Neither proposal is a miracle cure. But even attempting to make progress in this area would increase concerns in Washington that the dollar’s dominance was at risk. This would incentivise decision-makers there to cooperate more with Europe, or at least not to antagonise it with impunity.

The market distortion caused by US extraterritorial measures that affect European companies can be calculated. A regular EU report could make these disadvantages public and analyse how much market share is lost to competitors such as China as a result of unilateral sanctions policy. A common transatlantic approach would make much more sense.

In line with European values, the European Commission could be given a redressive instrument – such as conditions or penalties that the EU could apply to US companies entering the European market. They might have to pay a fine or have greater difficulty in accessing EU research and development funding or European public procurement markets.

This would simply be a matter of balancing out the disadvantages imposed on European companies. The (opportunity) cost assessment could start with the €4.8 billion that Nord Stream 2 would save European consumers in 2021 alone in the EU internal gas market.

Ultimately, a decision on such a project must be taken in Europe, not in Washington or Beijing. The geo-economic picture is much bigger for Germany and Europe than just the Nord Stream 2 project. The main issue facing them both is how to respond to the increasing US use of extraterritorial measures. It should work out how to do so soon, or potentially else find itself subject to many more over the coming years – regardless of whether Biden becomes president.

An earlier version of this piece was published in Der Tagesspiegel.