Why penalising the 'global post office for banks' to punish Iran is wrong

By threatening to penalize Swift, the financial messaging service, the US is alienating European allies and could undercut the dollar's dominance.

During the war on terror, the United States quietly turned the world financial system into a hidden empire. The American government used the power of the dollar and its influence over obscure organizations such as the Swift financial messaging service to monitor what its adversaries and terrorists were doing and, in some cases, to cut entire states, such as North Korea, out of world financial flows. These policies effectively pressed foreign banks into service as agents of American influence and helped bring states like Iran to the negotiating table.

On Nov. 4, the United States is set to escalate sanctions against Iran as part of its decision to withdraw from the Iran nuclear deal. These sanctions include financial messaging, so the Trump administration could press for Swift, a private cooperative based in Brussels, to disconnect Iranian banks from its network. Swift is like a global post office for banks, providing a secure messaging system for the vast majority of international transactions, so disconnecting Iran would isolate it almost completely from the global financial system and would have drastic and immediate consequences for the Iranian economy.

If the Trump administration goes ahead with this plan, it will have serious consequences for the United States as well. It will undermine America’s influence over the international financial architecture and diminish its power over allies and adversaries alike.

Jack Lew, who served as secretary of the Treasury from 2013 to 2017, warned two years ago that other countries might start looking for alternatives to the dollar and organizations like Swift if America takes its financial power for granted. Germany’s foreign minister, Heiko Maas, recently threatened to do just that. In an editorial published in the German financial newspaper Handelsblatt, he proposed that Europe should set up its own international payment channels and its own equivalent of Swift.

Angela Merkel, the German chancellor, partly walked back this proposal, but she too has said that Europe cannot rely on the United States and must “take our fate into our own hands.” German and French policymakers are investigating an alternative to Swift and other ways to decouple European banks from American financial markets. The European Union and the United Nations have already set up a special payment system to facilitate trade with Iran.

These baby steps may falter, but they provide a glimpse of what the world would look like if Europe became a competitive global financial power.

One of the promises of globalization was that it would promote peace and stability by creating international economic networks that make countries more dependent on one another. Instead, America has weaponized this interdependence, twisting Swift and the dollar clearing system to strangle its adversaries. Other powers could do the same, or even undermine the United States by building alternative global networks.

That is why the United States needs European cooperation with its approach to pressuring Iran. The European Union is the one power that could credibly test America’s dominance. The E.U. may not have an army, but it does have economic might. And it can use that power to harm American companies and, if pushed far enough, fragment the international financial system.

Over the last two decades, the European Union has built up an impressive body of financial rules and officials to administer them. Recent political turmoil, from the Great Recession to the eurozone crisis, has strengthened Europe’s regulatory power. Previously, this power was deployed in concert with the United States, but soon it may be deployed against it. Google and Facebook have already felt the first blows, expressed in the threat of billion-dollar fines by European regulators.

If Europe starts to build its own alternative financial architecture, it will be in reaction to American overreach. The Trump administration has already threatened penalties against European companies if they do business with Iran, and the standoff has revealed the full extent of European exposure to this kind of coercion. President Trump’s national security adviser, John R. Bolton, has bluntly warned that Swift needs to ask if it is “worth the risk” to defy the United States on Iran. The Treasury secretary, Steven Mnuchin, reportedly opposes forcing Swift to implement American sanctions. However, Congress could force Mr. Mnuchin’s hand with legislation, proposed by Senator Ted Cruz, that would require the administration to impose sanctions on Swift members.

Sanctioning Swift would be a mistake for the United States. If the European Union can no longer rely on the United States, it will move to further develop its own payment channels. This would take years, but the end result could isolate the United States. Other countries — not just those in Europe — may prefer to be part of a European-led financial network, one that is backed by a publicly stated commitment to the rule of law, rather than a global financial system dominated by an increasingly unpredictable America. European politicians have long looked with envy at the power of the United States dollar. They now have an opening to position the euro as a viable competitor.

The Trump administration hates being constrained by its allies. What it does not realize is that American economic power depends on the assent of other countries to be part of a financial system led by the United States. Push them too far, and American authority and influence could be permanently undermined.

Henry J. Farrell is a professor of political science and international affairs at George Washington University. Abraham L. Newman is a professor in the School of Foreign Service and Government Department at Georgetown University.