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Is time ripe for EU extraterritoriality?

Five foreign affairs and trade experts highlight four areas where the EU could protect its sovereignty against US sanctions.

If one accepts Jean-Claude Juncker’s last State of the Union speech in September 2018, “the time for European sovereignty has come.” As if to prove his case, Donald Trump affirmed this before the UN General Assembly a couple of weeks later by declaring that “responsible nations must defend against threats to sovereignty.”

And yet, after a decision by the American president to withdraw from the nuclear agreement with Iran, also known as the Joint Comprehensive Plan of Action (JCPOA), the Europeans will be hit by new extraterritorial US sanctions on 4 November. A similar case arises with Russia, as soon as new US sanctions go beyond those jointly agreed with the EU.

Under such conditions, should the EU, in the name of its own sovereignty, call into question the practice that the United States has taken it upon itself to make decisions for the rest of the world? If yes, how? If no, what should be done?

Currently, Europe’s only response to US extraterritoriality is EU Regulation 2271/96 of 1996, the so-called Blocking Regulation. It was amended on 6 June 2018 in response to the US withdrawal from the JCPOA.

Under this regulation, the EU prohibits European companies to comply with US extraterritorial sanctions. Companies are faced with the choice to lose access to the American market or even a US penalty on the one hand, and the threat of an EU fine on the other. But as no European company complying with American embargoes has been sanctioned to date, the choice for companies is straightforward.

The Blocking Regulation also provides a protection instrument, but it is currently impractical. A European company that withdraws from a contract, for example in Iran, could bring a claim for compensation before a national court. It is up to the judge to assess the damage and compensation. For compensation it could go so far as seizing assets of the US government in Europe, although no proceedings of this type have been initiated to date.

With the European Parliament elections looming under the slogan “a Europe that protects” –  which appears to have great appeal from various sides of the political spectrum – and bearing in mind Mr Juncker’s comments on sovereignty, it would seem inconceivable to expect no reaction from the EU.

The EU could build its own extraterritorial system, analogous to the American one: same legal instruments, same organisational structures and same judicial control. But this extraterritoriality would be applicable only to specific and predictable instances, defined by EU law. The extraterritoriality of European norms would lead to the extraterritoriality of European sanctions.

There are four main areas where this could be applied: environmental protection, biodiversity and climate change; anti-corruption measures; tax evasion; and the protection of personal data.

To ensure the implementation of such extraterritoriality, Europe would have to acquire the means to do so. For instance, it would need to set up a European Office of Foreign Assets Control which, like its US equivalent the OFAC, would issue licences and authorisations to invest/export based on EU foreign policy and security requirements.

If necessary, the EU would continue to have its own list of prohibited individuals and it could also extend the powers of the European Anti-Fraud Office in the fight against corruption.

There would still be a fundamental difference between the EU and US systems: for Americans, the definition of national security is subject to change, subjective and reversible. It allows the US to change course at any time. European norms on the other end, collective and based on objective as well as permanent criteria, are not as malleable.

Changes of this magnitude would undoubtedly trigger debates in the European Council and European Parliament. If agreement between the 27 Member States was impossible, or if the current provisions of the EU treaties preclude it, enhanced cooperation between some Member States could be envisaged, although it would be weaker than a unanimous European response.

In the absence of EU consensus, there remains the possibility, even the need, to strengthen current mechanisms in order to enable a sufficiently strong reaction to the American measures and protect European interests. EU countermeasures would be based on reciprocity, which allows retaliation against states that violate their obligations, in particular from international agreements that were endorsed by the UN Security Council.

Several existing mechanisms could be strengthened, including: subjecting foreign bank activities to new EU approvals (approval could be refused to companies from a third country that imposes extraterritorial provisions on EU firms); establishing a European Special Purpose Vehicle (SPV) as announced by European Commission Vice-President Federica Mogherini in New York; implementing the proposal made by German Foreign Minister Heiko Maas for EU financial regulations on Euro transactions.

Whatever the European response will be, its effectiveness will to a large extent depend on whether the EU decides to address the superiority of the dollar. The creation of the Euro has in no way called this into question. It is difficult to see how a rebalancing of sovereignty would be possible without a more robust EU approach towards the dollar. Finally, the implications of the intensifying American-Chinese rivalry should also be taken into account.

This article was written by Marie-Hélène Bérard (investment banker), Farid Fatah (Ph.D. candidate in Law), Pascal Lamy (President emeritus of the Jacques Delors Institute), Louis Schweitzer (Honorary Chairman of Renault), and Pierre Vimont (Senior Fellow at Carnegie Europe). It is based on a paper recently published by the Jacques Delors Institute.