So now Congress is trying to get the European Central Bank to tighten up its restrictions on Euros that go indirectly to Iran through its Target payment system. (See for example this article in the Financial Times). The whole thing begins to sound a little like high school drama: The angry junior refuses to talk to her enemy, and also to anyone disloyal enough to talk to her enemy. Soon that’s not good enough; anyone who talks to someone who talks to her enemy is also on the hit list. In the end, of course, her standards become so high that she ends up talking to no one but herself.
To be fair, the sanctions against Iran have been much more effective than a skeptical economist would have believed: trade is much reduced–and what does get through is much more expensive, which, from the point of view of the economist was the real point anyway. But over time, sanctions are of diminishing effectiveness, as the target learns to devise evasions, and as the countermeasures to the evasions begin to disrupt the lives of more and more third parties.
In their DC bubble, congressmen are likely to believe that the regulatory power of the US is absolute: To their way of thinking the European Central Bank should tighten its requirements because it is the right thing to do, but there is always the implicit threat of restrictions to Europeans’ use of the dollar payments system and resources. The only catch with the logic is that the dollar payment system is not the only one in town. The Euro is already an important alternative, and the Chinese, while still waiting in the wings, are seriously considering the advantages they can reap from opening their payment and currency systems to the world. Certainly, there is a way to go before the typical commercial transaction can be carried out as safely, cheaply and reliably through renminbi as through dollars, but American restrictions that hit non-combatants in the economic warfare with Iran can bring that day a lot closer.