Editorial Board

EU Wimps Out on Oil Sanctions to Halt Iran’s Nuclear Drive: View

Who would have thought a week in which protesters rampaged through the U.K. Embassy in Tehran would end with Europe going soft on the Iranian regime? Yet that’s exactly what happened.

At a meeting Dec. 1 in Brussels, European Union foreign ministers on measures against some 180 individuals and companies in reaction to Iran’s continued support for terrorism and an International Atomic Energy Agency report finding that Iran had conducted secret activities “specific to nuclear weapons.” This was expected and deserves a positive response (as do new penalties the ministers announced against Syria).

The real news, however, was what the EU didn’t do: Announce an agreement, proposed by France and backed by the U.K., Germany and the Netherlands, to proceed with a full embargo on imports of Iranian oil. Instead, Catherine Ashton, the EU foreign policy chief, said that any consideration of steps against Iran’s energy sector would go “to the technical experts.”

There are two main arguments against a European embargo: It would disproportionately harm the EU’s weakest economies, such as Spain and Greece, and Iran would simply ferret out other markets if Europe is shut off. Both are valid points but unpersuasive.

An embargo on Iranian crude would doubtless put pressure on oil prices in Europe. Greece has recently stepped up its purchases of Iranian oil because other suppliers are leery of the country’s credit risk; shaky Spain and Italy use much more of it than say, France. Still, Iran accounts for only 5.7 percent of Europe’s oil imports.

And oil is a global commodity, with European prices affected by any number of variables. For example, the Nov. 30 move by the Fed and other central banks to ease borrowing costs for financial firms drove Brent crude prices to a two-week high. Should the banks’ move have been rejected over Greece’s oil concerns?

An embargo on Iran can be coordinated with increases from other producers, and Europe already stands to see increased imports as Libya ramps up production after the ouster of Muammar Qaddafi. The costs of an embargo can be borne.

As for Iran finding other buyers, more than half its exports already go to China, India and Japan, and no country likes to be too dependent on any single producer. If Europe were to sign on to an embargo, it is not unreasonable to think Japan would feel that much more pressure to join its Western political and military allies.

An embargo need not be global to put pressure on the target. We have seen this already with Iran. Industry insiders suspect that it is now or will soon offer its remaining customers oil-price discounts to stay loyal -- in part because of measures the U.S., U.K. and others have taken against Iranian financial institutions that make processing purchases more difficult.

Iran has also sweetened the pot for India, giving refiners there far more generous payment options than those available from countries such as Saudi Arabia. Mark Dubowitz, an Iran expert with the Foundation for the Defense of Democracies told Bloomberg Businessweek that Iran might have to offer China discounts as large as 40 percent should Europe, Japan and South Korea forgo its crude.

As we have argued before, the point of sanctions against Iran is to make doing business with it so difficult that even countries unwilling to join the embargo will look for other suppliers. An unambiguous statement by the EU on an embargo at the ministers’ next meeting in January would be a major step forward. If, however, the holdouts in southern Europe block that option, France and the U.K., which are considering unilateral embargoes against Iran, should take the plunge and urge Germany to join them.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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