Relations between the EU and Iran have substantially improved since the conclusion of the nuclear deal in July 2015.² In fact, as much as several issues continue troubling relations between the two sides, European–Iranian exchanges at the levels of politics, economics and civil society have increased and improved substantially in the recent past. In important ways, Iran also matters to Europe’s relations with the broader Mediterranean region —through its considerable influence, stretching from Iraq over Syria to Lebanon.
In light of this, the chapter seeks to provide an assessment of the current state of affairs between the EU and Iran. The chapter delves into how the EU and its policies are perceived and interpreted in Iran, while elaborating on stakeholders and the changing nature of the relations between the two sides in line with the conceptual framework.³ The chapter draws from first-hand insights gained during regular encounters with dozens of foreign policy experts and professionals from the Iran, the EU, and EU member states. During these encounters, the perspectives of both sides, respectively, were discussed extensively.
The chapter consists of three sections. In the first one, a country profile is presented. This comprises a discussion of Iran’s demographics, important stakeholders, relevant events for Iran since the Arab Spring, Iran’s main geopolitical challenges and a brief overview of European–Iranian relations. In the second section, relations between Europe and Iran are examined in more detail. The third section includes a discussion of Iranian perceptions towards the EU and its Iran-related policies, challenges for Iran and Europe’s role, Iranian expectations towards Europe, co-operation areas with Europe and finally several general policy recommendations for the EU.

Country profile of Iran

1.1 Demographics

Iran is a large and diverse country. At 81 million, its population is the world’s eighteenth largest. Unlike a few decades ago, however, population growth has decreased and now stands at 1.2 percent. The Iranian population is mostly urban with three-quarters (73.4 percent) living in cities. While almost 70 percent of the Iranian people are below the age of 35, life expectancy at birth is at 76 years for women and 74 years for men.⁴
Iran finds itself at the crossroads of several regions. As such, the country is Middle Eastern, Caspian, and Central Asian. Moreover, through its neighbours there are strong links to both the Mediterranean and Europe in the West and Asia in the East.
This exposure to different cultures and civilizations is reflected inside the country, too: Iran is a multi-ethnic and multi-lingual country. Some 61 percent of the population is Persian, and Farsi (the Persian language) is both lingua franca and official language of the country. However, other languages are also spoken and Iran takes pride in bringing together several ethnic groups. Azeris constitute the second largest group (16 percent), followed by Kurds (10 percent), Lurs (6 percent), Arabs (2 percent), Baloch (2 percent), Turkmens (2 percent) and others (1 percent).⁵ The vast majority, between 90 and 95 percent of all Iranians, are Twelver Shiite Muslims. Sunni Muslims comprise the bulk of non- Shia Iranians, at between 5 and 10 percent. In addition, there are three officially-recognized religious minorities: Christian, Jews, and Zoroastrians. Iran is home to the largest Jewish community in the Middle East outside Israel and Palestine.⁶

1.2 Relevant stakeholders at the domestic, regional, and global levels

The political system of the Islamic Republic of Iran is characterized by a myriad of stakeholders. Institutionally, a very broad distinction can be made between republican and theologically legitimized institutions. The former resemble, by and large, European-style republican institutions and feature separate legislative (Parliament) and executive branches (President and Government) as well as a council of religious experts (Assembly of Experts, charged with choosing the leader of the revolution, the Islamic Republic’s highest office). Members of these institutions are directly elected by the people. Among the latter institutions, the Supreme Leader—who is the head of state—is chosen by the Assembly of Experts. In turn, the Supreme Leader appoints the Heads of Judiciary and Armed Forces as well as the members of the Expediency Discernment Council (a body charged with advising the Supreme Leader and de facto having oversight of the legislative process). The Guardian Council—whose task is to interpret the constitution of the Islamic Republic (approving/ rejecting laws) and oversee all elections (including the approval of candidates)—is elected half by the Parliament and half by the Supreme Leader.⁷
This institutional complexity is reflected in the decision- making process for Iran’s foreign and security policy. Obviously, the government assumes a leading role with regard to the articulation and implementation of Iran’s foreign policy. At the same time, most of the numerous institutions of the Islamic Republic’s polity are, to varying degrees, also involved in the foreign policy process. The single most important institution in this regard is the Supreme National Security Council (SNSC). The SNSC brings together representatives from all relevant institutions. In the realm of foreign and security policy, it is the key forum for negotiation and adoption of an elite consensus, which Iran’s highly fragmented political system typically requires in order to proceed with new policy directions. Current President Hassan Rouhani served as the Secretary General of the SNSC between 1989 and 2005.

1.3 Key events since the start of the Arab uprisings

Dubbed ‘Arab Spring’ in the West, the uprisings in the Arab world in 2010–2011 have been welcomed by Iran as a ‘bidariye eslami’ [Islamic awakening].⁸ Somewhat reminiscent of its own 1979 Islamic Revolution, Tehran saw Western-backed and secular authoritarian leaders being replaced by popular Islamic movements.
The ascendance to power of Rached Ghannouchi in Tunisia and— more importantly from the Iranian perspective—Mohamed Morsi in Egypt was important for Tehran in several ways. On the one hand, the Islamic Republic considered the successes of political Islamic groups, i.e., the Muslim Brotherhood and its various branches, as a testimony for its own cause. On the other hand, Tehran assumed popular Islamic rulers in these traditionally Western-leaning countries might be more open to co-operation with Iran, thus advancing Iran’s geostrategic position.
In the Levant, however, matters unfolded differently in the eyes of Iran’s leaders. Also in Syria the people took to the street. But from the early stages of the protests—which were brutally repressed by the Syrian government—Tehran saw outside interference, in particular from Turkey and Arabian Peninsula countries Qatar, Saudi Arabia, and the UAE. Syria has been and is one of Iran’s few Arab partners. It is further a vital bridge to Lebanon, where Tehran’s ally Hezbollah relies on Iranian support. Tehran feared that a defeat of President Bashar al- Assad would bring Syria into the camp of its arch-rivals. In response, Tehran massively assisted al-Assad in fighting the opposition and foreign-backed rebels.
Between 2014 and 2017, Tehran supported the fight against the so- called ‘Islamic State’, both in Iraq and in Syria. As such, in 2014 Tehran dispatched units to prevent IS from taking over both Baghdad and Erbil. Among Iraq’s Popular Mobilization Units, several enjoy close relations with Tehran.
In the international arena, the single most important event in Iran’s recent history was the conclusion of the 2015 nuclear agreement, the Joint Comprehensive Plan of Action (JCPOA). The JCPOA, agreed between Iran and the EU/E3+3,⁹ was to end over a decade of negotiations and sanctions over Tehran’s nuclear programme. In essence, the JCPOA stipulates a reduction of the Iranian nuclear programme and greater international inspections in exchange for the lifting and/or termination of nuclear-related sanctions by the European Union, the United Nations, and the United States.¹⁰ Beyond the nuclear issue itself, the JCPOA was the first major accord between Iran and the United States since the 1979 revolution.
The change in the US Presidency from Barack Obama to Donald Trump also marked a change in US dealings with Iran. The US exit from the JCPOA has cast a shadow of uncertainty over the future of the Plan and Iran–US relations in general. Broadly, the Trump administration has been extremely sympathetic to the positions of Iran’s regional rivals, Israel, and Saudi Arabia. This has given rise to fears regarding an escalation of tensions in the region.

1.4 Main geopolitical challenges

The first and foremost challenge confronting Iran’s foreign policy is the country’s strategic loneliness. Iran’s military spending is significantly below the expenditures of major countries in the region ¹¹ and Tehran has no access to the latest Western and Russian technologies. This leaves the country vulnerable in face of regional rivals and global adversaries. Moreover, Tehran has no militarily capable allies and is not part of any institutional security arrangement. This distinguishes Iran from several of its neighbours, who are either part of NATO or the GCC and, in any case, enjoy close ties to the US and European states like France or the UK.
Further, the worldview of Iranian decision-makers is deeply shaped by their country’s dramatic experiences with foreign meddling over the past centuries: In the nineteenth century, Tehran had to give up important parts of its territory—located in today’s Afghanistan and the Southern Caucasus—due to British and Russian pressure. In the twentieth century, Iran was repeatedly occupied by British and Russian forces during the First and Second World Wars and, after the nationalization of Iranian oil, democratically elected Prime Minister Mohammad Mossadegh was toppled by a CIA-backed coup d’état in 1953. After the 1979 revolution, during the eight-year Iran–Iraq War (1980–1988), Iran was victim of Iraqi chemical weapon attacks against both military units and civilians. The United Nations failed to condemn and/or act against the Iraqi use of chemical weapons, which—from the point of view of Iran’s current decision-makers—has further enhanced their sense of strategic loneliness.

These experiences have proven to Iran that it is barely capable of defending itself on its own soil and that it has to embark on alternative routes in order to address the perils of its strategic loneliness. By and large, the Islamic Republic is pursuing two pathways in parallel. First, it is advancing its missile capabilities to be able to deter adversaries by acquiring the capability to strike back in the event of an attack.

Second, Iran is trying to obtain some sort of strategic depth aiming at strengthening the Iranian position in the broader Middle East region. This is done through a combination of co-operation with states and governments (e.g., in Afghanistan, Armenia, Iraq, Syria, or Lebanon) as well as non-state actors (e.g., in Iraq or Lebanon and, to a lesser extent, the Palestinian territories, Bahrain, or Yemen). Moreover, Iran also seeks to improve its position through deepened economic ties, in particular with its neighbours Afghanistan and Iraq.
In terms of concrete threats, Iran’s greatest concern is the United States. Ever since the revolution in 1979, ‘regime change’ ideas have been entertained in Washington, albeit to varying degrees. The Obama administration appeared to differ, which paved the way for the 2015 nuclear deal. But under President Trump, the United States has not only returned to past notions of regime change, but even escalated the rhetoric vis-à-vis Iran.
At the regional level, Israel, and Saudi Arabia are Iran’s main rivals. However, while they are militarily capable (especially Israel), Iran does not appear to consider these countries to pose a fundamental threat to the existence of either the country itself or its regime. The fear is, though, that these countries might succeed in bringing the US into a conflict on their behalf.

Overview of Iran–EU Relations

As the global status of the European colonial powers declined during the twentieth century, the US emerged as Iran’s primary political partner during the Cold War. The importance of European countries to Iran shifted largely to the economic realm.¹²

After the 1979 revolution, political and economic relations with Europe deteriorated. However, unlike with the United States, diplomatic relations were never cut. Especially after the 1980–1988 Iran–Iraq War, economic and also political exchanges with Europe increased again. However, European–Iranian relations became once more strained after Iran’s nuclear programme became the focus of international controversy in 2003, followed by the populist presidency of Mahmoud Ahmadinejad (2005–2013) and harsh crackdown on public protests in the aftermath of the contested 2009 elections. During these years, Europe began to support multilateral sanctions against Iran within the framework of the UN. ¹³ Later, in 2010, the EU began to impose unilateral sanctions, which caused significant harm for the Iranian economy (see below).
At the same time, the EU and the so-called ‘E3’—comprising the three European states France, Germany, and UK—were central to the negotiation effort between Iran and the international community to resolve the nuclear issue. This gained momentum after moderate- minded Hassan Rouhani became president of the Islamic Republic in 2013. Two years later, in July 2015, these negotiation efforts resulted in the conclusion of the Iran nuclear deal, the JCPOA, which led to the termination of all nuclear-related EU sanctions and shifted the overall momentum from confrontation towards co-operation.

2.1 The changing structure and nature of interactions with the EU

The conclusion of the JCPOA in July 2015 opened the latest chapter in the relations between Europe and Iran. In both Europe and Iran, its implementation—which commenced in January 2016—gave rise to hopes that this would lead to a broadening and deepening of relations.
There is an overall consensus that the JCPOA has met its main objective: guaranteeing the peaceful character of the Iranian nuclear programme—at least for the duration of the deal. This is underlined by the repeated confirmation of Iranian compliance with the JCPOA by the International Atomic Energy Agency (IAEA).¹⁴

In the wake of the JCPOA, European–Iranian exchanges have drastically changed. Politically, high-ranking visits marked the opening of a new chapter in EU–Iran relations. Economically, trade has grown substantially, although the overall volume remains below pre-2010 sanctions levels. ¹⁵ At the level of civil society, university co-operation and tourism have increased.
Nevertheless, there is also recognition in Tehran and in European capital cities that many of the expectations which emerged parallel to the conclusion of the JCPOA have not materialized.¹⁶ Iran hoped for greater economic recovery following the nuclear deal. In fact, in exchange for reducing its nuclear programme, Tehran expected the removal of international sanctions: i.e., to reconnect the Iranian economy with the world. While trade, especially with Europe, has increased, it is below the expectations of both Iranian officials and ordinary citizens. In particular, fear of punitive measures by the US has effectively curtailed European engagements in the Iranian economy.
Moreover, Tehran hoped the JCPOA would lead to recognition of Iran as a regional power. In light of the country’s traumatic historic experiences, Iran is convinced it can only ensure its own security through engaging in the region.¹⁷ Against this backdrop and in light of harsh criticism for its role in the Middle East, Tehran continues to feel that Europe—alongside the US and countries in the region—does not sufficiently appreciate Iranian security concerns.

On the other side, Europe hoped the JCPOA would lead to what European officials describe as a more constructive Iranian role in the Middle East or, depending on the viewpoint, the broader Mediterranean region. Both regarding Iraq and Syria, many Europeans are convinced that Iran—using its influence in these countries—could facilitate some form of power-sharing agreements among the various stakeholders. Europeans also express concerns about repeated Iranian ballistic missile tests.
These unfulfilled expectations constitute stumbling blocks, hampering the broadening and deepening of European–Iranian relations. Differences regarding the situation in the Middle East/Mediterranean particularly stand in the way of a fully-fledged partnership. To this day, the JCPOA has not translated into substantive European–Iranian exchanges on how to address the various challenges of the region. Quite the contrary, in many cases, Europe and Iran consider the positions of the other side, respectively, as highly problematic. In 2018, tensions over Syria increased, with the potential to escalate into open conflict between Iran and Israel. For obvious reasons, Europe would be very much affected by any such escalation of tensions (in terms of migration, stability, etc.).

Despite the challenges, however, relations between Europe and Iran have intensified since the conclusion and implementation of the JCPOA. In a number of areas, Europe and Iran are seizing on the momentum created by the nuclear deal. These include action on academic co- operation, climate change, and international drug-trafficking.
The intensification of EU–Iran relations has become particularly clear as the presidency in the United States changed from Barack Obama to Donald Trump. Under the new administration, the US withdrew from the JCPOA in May 2018.
While acknowledging its own strong commitment to the deal, Iran is worried that Europe, while staying in the JCPOA, might take a harsh stance towards Iran on issues outside the nuclear agreement. Foreign Minister Mohammad Javad Zarif expressed concerns that Europe might ‘pander to Washington’s determination to shift focus to yet another unnecessary crisis—whether it be Iran’s defensive missile program or our influence in the Middle East’.¹⁸
All in all, European–Iranian relations have significantly improved parallel to the conclusion and implementation of the JCPOA. Never- theless, despite a commitment on both sides to improve ties, the overall political framework of relations between Europe and Iran remains somewhat fragile.

Elite Survey: Research findings on Iran

3.1 Perceptions towards the EU and its Iran-related policies

Iran looks at Europe with mixed feelings. Meanwhile, the European– Iranian relationship is developing, featuring elements of both co- operation and confrontation.
Generally, Iran sees its relations with Europe as inherently troubled, in that Tehran considers Europe to be, by and large, part of the broader US-led Western camp. Ever since the 1979 revolution, Iranian officials have suspected the US is entertaining regime change policies towards the Islamic Republic. European countries have generally not adopted US notions of regime change; but at the same time, they have been unable to effectively take this element out of the broader Iranian–Western relationship. Further, the EU and its member states remain outspoken about Iran’s human rights record and are concerned by the country’s involvement in the region, certain elements of the country’s ballistic missile programme, and the rejection of Israel’s right to exist.
Nevertheless, Iran has fostered quite constructive relations with both the EU and numerous of its member states. Diplomatic channels have always remained open and political and economic exchanges have continued, albeit to varying degrees. As such, there is a substantial element of co-operation in the relations between Iran and Europe.
A subordinate, but growing political position: Politically, Europe’s role in the Middle East/Mediterranean has been subordinate, from the Iranian point of view. For most of the past decades, the US has been the most relevant foreign actor in the broader region. Partly through co-operation with regional countries (Egypt, Israel, Saudi Arabia, and Turkey) and partly through direct military interference (in Afghanistan and Iraq), Washington assumed a central role in defining and safeguarding the regional order—which, from Tehran’s point of view, has been decisively directed against the Islamic Republic.¹⁹
Against this backdrop, the profile of the EU and its member states was of secondary importance to developments in the region. Some EU countries joined US military efforts, and Europeans are involved in extensive arms sales, especially to Arabian Peninsula countries. Nevertheless, when it comes to the more fundamental political questions in the Middle East, especially those concerning war and peace, Iran generally does not consider the European role to be particularly significant.
However, in the Iranian view, Europe’s profile has gradually increased since 2003 as the so-called ‘E3’ (France, Germany, and the UK) have initiated negotiations with Iran in an attempt to diplomatically solve the international dispute surrounding the Iranian nuclear programme.²⁰ The E3 were soon joined by the EU in 2004 and later, in 2006, by world powers China, Russia, and the US. Together, the group became known as the E3/EU+3. The E3 and the EU assumed a central role in co-ordinating the international negotiation effort with Tehran. Moreover, the format allowed for the first meaningful diplomatic process between Iran and the US since the 1979 revolution. Therefore, the conclusion of the nuclear deal in July 2015, formally known as the JCPOA, was very much a success of European foreign policy and appreciated as such by Tehran.²¹

In the course of negotiations on Iran’s nuclear programme, Tehran also began to fully acknowledge Europe’s economic weight. In 2010, the EU joined the US and the United Nations in adopting sanctions against the Islamic Republic over the country’s nuclear activities. European energy and finance sanctions caused substantial harm to the Iranian economy (see above). Among other impacts, this resulted in Iran being effectively cut off from the international financial system (as access to the Belgium-based SWIFT banking network was suspended), a reduction of Iranian oil production, the halving of Iranian oil exports, and a reduction of European trade with Iran from 27.8 billion in 2011 euro to 6.2 billion euro in 2013.²² Overall, the imposition of European sanctions on Iran led to years of negative real GDP growth in 2012, 2013, and 2015.²³
With JCPOA implementation in January 2016, Tehran hoped to end years of international sanctions over the Iranian nuclear programme and to reconnect with the global and, especially, the European economy. In this regard, Europe assumed a special position for Iran since essentially, European–Iranian trade is key to meeting Iran’s economic expectations associated with the nuclear agreement.
Europe’s importance to Tehran grew further in 2017 with the change in the US presidency from Barack Obama to Donald Trump. The new US president has been an outspoken critic of the JCPOA and withdrew the US from the treaty in May 2018.
The increasingly harsh stance of the US towards Iran has translated into a more prominent European role. On the one hand, the US seeks to shift to Europe the burden of the nuclear deal. By asking Europe to ‘fix’ what Washington sees as flaws, Trump might intend to blame Europe, given the US withdrawal from the deal. At any rate, Europe now is in the spotlight when it comes to the future of the nuclear deal. It remains to be seen whether it can offer Iran sufficient economic and political incentives to remain in the JCPOA even without the US (in the economic realm, it appears, Europe will not succeed in compensating for the fallout from the American JCPOA exit).
On the other hand, Tehran is beginning to appreciate Europe as an important actor on the international stage in its own right and independent from the US. The EU and its member states no longer merely act as a cover to facilitate Iran–US diplomacy. Rather, Europe now has both a crucial responsibility and political weight: whatever steps Europe ends up taking, the actions of Brussels and EU member states are likely to have great importance when it comes to the future of the nuclear deal and, as such, the nature of Iran’s engagement with the international community.²⁴
The desire to reconnect with the European economy: Economically, Iran’s view of Europe is a reflection of the political relationship between the two sides. Unlike Asian or Russian companies, and in the absence of meaningful business ties with the US, in most cases, Europeans are offering the latest technologies and products available to Iran. Therefore, Iranians show great interest in co-operation with Europe, especially, but not only, in the industrial sector.²⁵
However, there is also a great deal of caution. As highlighted above, before the nuclear deal, EU sanctions caused significant harm for Iran’s economy. In response, Tehran adopted two important measures. First, the country initiated a series of economic policies under the umbrella of the so-called ‘eghtesad-e moghavemati’ [‘resistance economy’].²⁶ These seek to bolster economic autonomy by reducing international (inter-)dependence: foreign products are to be replaced by domestic production—which basically constitutes an import substitution industrialization approach—while boosting Iran’s own exports. Second, Iran’s foreign trade increasingly shifted to Asia. As China, India, and other Asian countries do not tend to mix political and economic matters the way Europe does, Iran feels incentivized to promote economic ties with the states to its east.²⁷

Iran’s approach to Europe: cautious engagement: These observations reflect the general Iranian stance towards Europe but there is obviously no one single Iranian approach. In this context, it is important to note that there is no particular foreign policy debate in Tehran on Europe alone. Rather, discussions on Europe are a function of the broader Iranian foreign policy discourse.
Here, ontheonehand, thegovernmentof President Rouhaniadvocates for a constructive engagement with the international community. Rouhani represents a coalition of pragmatists and reformers, who joined ranks under the umbrella of e’tedaal [moderation]. The Moderates argue that the Islamic Republic’s survival can best be assured through co-operation with the outside world. Especially also in the economic realm, the Islamic Republic will need to foster conducive relations with the world. Considering that relations with the US remain extremely complicated, this camp wishes to deepen ties especially also with Europe, parallel to already expanding relations with Asian countries.
On the other hand, the broader conservative camp in the Islamic Republic—oftentimes referred to as the ‘osul-garâyân’ [Principlists]— calls for greater autarky and interdependence. As such, the Principlists are highly critical of President Rouhani’s approach. Principlist policy- makers suspect that the West, and in particular the US, are not only generally opposed to the government but actively seek to overthrow it. Accordingly, they have criticized the JCPOA as being detrimental to the interests of Iran. Since JCPOA implementation in January 2016, Principlists have expressed their scepticism towards the Rouhani government’s ambition to especially deepen economic ties with Europe.²⁸

Overall, these two schools of foreign policy thought condition Iran’s approach to Europe, which can generally be described as one of cautious engagement. The administration of President Hassan Rouhani is interested in deepened ties with the EU and its member states, especially on the economic but also on the political front. At the same time, Iran— and especially the Principlist faction—is keen to avoid being overly vulnerable to political and economic pressure by Europe.

3.2 Challenges for Iran and Europe’s role

Iranian decision-makers are confronted with numerous challenges in the fields of security, economy, and migration. Compared with most countries of the broader Middle East region, the position of Iran is arguably better. The Iranian state generally functions and is able to secure the country’s territory. Economically, it has already been decades since Iran embarked on its industrialization process, which has resulted in a somewhat diversified economy with an industrial base. Similarly, despite migration in no small numbers, migration-related challenges are not threatening the social fabric of Iran. Nevertheless, the challenges facing Iran are huge and for many of the country’s problems there are no easy fixes.
Security: Iranian officials consider the Islamic Republic’s security situation to be precarious. Tehran sees Iran as strategically alone in a region where all relevant powers possess military capabilities far exceeding those of their own. Coupled with traumatic historic experiences, this awareness shapes the widely held Iranian view that the country is highly vulnerable.²⁹ In order to overcome these weaknesses perceived by Iranian decision- makers, Iran seeks to expand its strategic depth through adopting a compensatory deterrence strategy. Tehran has come to understand that it is unable to effectively counter foreign powers on its own soil—the last instance being the Iran–Iraq War between 1980 and 1988. In light of the factors discussed above, Tehran fears it would be unable to counter aggressions through traditional warfare. To make up for this, Iran is keen to be able to deter adversaries asymmetrically. Thus, in the event of a conflict, Iran does not intend to confront its opponents directly and/ or on its own soil. Rather, Tehran would like to be able to strike back against vulnerable points on the territory of its opponents and/or their allies (e.g., military bases, critical infrastructure, etc.). In this way the Islamic Republic hopes to increase the risks and costs for any country considering taking military action against it.³⁰
Essentially, this position is oriented towards the status quo Iran wishes to defend its territory and the Islamic Republic. On the ground, however, matters are more complex. Tehran’s quest for strategic depth is alarming to many countries throughout the region—not least Iran’s regional rivals, who fear the Islamic Republic is seeking regional hegemony. Iran’s revolutionary rhetoric and posture massively add to such fears. Therefore, Iran’s approach to overcome its security challenges results in somewhat of a paradox. By expanding its regional profile in an attempt to overcome vulnerabilities, Tehran unintentionally provokes further efforts on behalf of regional and international powers to counter the Islamic Republic, resulting in further threats to Iran’s security situation.

Economy: Iran’s economy faces a myriad of challenges. These comprise massive unemployment— especially among the youth—high inflation, chronic difficulties in foreign exchange, a problematic role of parastatal organizations in the economy, and an almost chronic lack of investments from abroad. For decades, revenue from oil production has played a central role in the economic development of the country. At the same time—and in contrast to many other oil-exporting countries—Iran already possesses an industrial base, and economic diversification has already been underway since the 1960s. As such, and notwithstanding the above-mentioned problems, the country has already successfully embarked on a process of industrialization.³¹
In 2013, Rouhani won his presidential campaign with a twin promise of delivering a nuclear accord and spurring economic growth. While the president delivered on the former, things are less clear-cut with the latter. Since the implementation of the nuclear deal, Iran has become the fastest growing economy in the Middle East and North Africa. In his first term in office, Rouhani also managed to bring down inflation from around 40 percent to below 10 percent. It did, however, increase dramatically once again in 2018. Similarly, Iran’s foreign trade, especially also with Europe, has grown markedly. Yet, progress is substantially below the expectations of both Iranian officials and the broader public.³² Thus, while important progress has been made, the broader challenges facing the Iranian economy remain to be tackled successfully.

Migration: For half a century, significant numbers of Iranians have been emigrating, while Iran is also a destination and transit country for large numbers of migrants from abroad. Already before the 1979 revolution, Iranians from upper- and middle-class backgrounds were leaving the country to study abroad, mostly in the US and Europe, and many remained abroad after the completion of their studies. In 1979 and the subsequent years, the revolution caused a sharp rise in the number of emigrants from Iran as political persecution forced many Iranians to flee their country. Over the years, economic factors have resulted in people from lower-income backgrounds also leaving the country. While the numbers have declined in the recent two decades—compared with the years following the 1979 revolution and 1980–1988 Iraq War eras—emigration remains an issue for Iran. In particular, ‘brain drain’ remains a huge challenge. While concrete data are scarce, large numbers of the highly educated groups in Iranian society continue to leave the country, seeking better opportunities abroad.³³ Parallel to this, Iran is also an important destination and transit country for migrants from neighbouring countries. To a very large extent, these come to Iran from Afghanistan but also, albeit to a significantly lesser degree, from Iraq and Pakistan.
The position of migrants in Iran is complicated. On the one hand, their situation is somewhat better than that of migrants in many other countries of the region. Migrants in Iran do not live in camps (as for example in Jordan or Lebanon) and there is also no organized system of economic exploitation (as for example in many Arabian Peninsula countries). Further, migrants in Iran generally have access to basic public schooling and health care. On the other hand, migrants find themselves disadvantaged vis- à-vis Iranian citizens. In many quarters of Iranian society, xenophobic sentiments are widespread. There is a significant element of economic exploitation as many migrants, lacking work permits, are forced to work on the black market, where basic labour rights are not granted. Refugees from Afghanistan especially face difficulties in obtaining residency permits and/ or citizenship, despite the fact that many have lived in Iran for a long time or were even born in the country. There are also reports of deportations, and detentions to this end, without sufficient legal process.³⁴
Quantitatively, the number of migrants to Iran exceeds the number of Iranians emigrating from the country. According to UNICEF, 765,000 Iranians resided abroad in 2013. At the same time, 4.2 million refugees lived in Iran, some 95 percent of whom came from Afghanistan.³⁵

3.3 Expectations towards Europe

By and large, there are two fundamental expectations towards Europe when it comes to official Iranian policy. Firstly, Iran seeks to realize the economic benefits it hoped for when it entered the JCPOA. Secondly, Tehran wishes to be recognized and treated as a regional power in the Middle East/Mediterranean. From Tehran’s perspective, these two issues fundamentally define relations between the two sides as well as the Iranian approach to Europe. At the level of civil society, there is also a third expectation: greater exchanges with Europe.
Economic recovery after JCPOA implementation: In important ways, with the conclusion of the JCPOA, Iran hoped for extensive economic recovery after years of sanctions. Iran agreed to limit its nuclear activities in exchange for sanctions relief, deemed key particularly for the revitalization of European–Iranian economic relations.
In fact, there have been important developments in this direction since JCPOA implementation in January 2016. Iran became the fastest growing economy in the Middle East and North Africa at a time when most of the region’s countries are suffering from chronic economic stagnation. Temporarily, inflation was brought down from above 40 percent to single digits. Concurrently, trade with Europe has picked up from 6.2 billion euro in 2013 to 20.9 billion euro in 2017.³⁶
Despite these positive developments, however, progress on the economic front remains considerably below the expectations of both officials as well as the public in Iran.³⁷ To a large extent, the uptick in economic activity is related to resumed oil exports, which require only very little labour. As such, unemployment in Iran remains high. Investments into the broader economy are still low. A key problem in this regard is the reluctance of major international banks to reconnect with Iran, fearing punitive measures from the US.
This has led to consistent complaints on the part of Iranian officials. From their point of view, Iran has been prevented from reaping the economic benefits associated with the JCPOA. Europe is criticized in this context for not providing sufficient (political) guarantees to European companies considering trade and investments with Iran.³⁸
Against this backdrop, Tehran expects more progress from Europe in tackling the obstacles that stand in the way of deeper European– Iranian economic relations. Iran would especially, but not only, like to see more progress in the realm of finance.³⁹ Several EU member states (Denmark, France, and Italy) have already opened state-backed credit lines to provide companies from their nations with Euro-denominated finance to engage in Iran. From the point of view of Tehran, these are important steps in the right direction. But more would need to be done towards the normalization of European–Iranian financial relations for Iran to reap the economic benefits it had hoped for when concluding the JCPOA. ⁴⁰

Recognition as a regional power: Iran seeks recognition as a legitimate regional power in the Middle East, which it feels Europe does not acknowledge. On the one hand, the country’s traumatic historic experiences have translated into a sense of strategic loneliness Iran seeks to overcome through advancing its strategic depth. On the other hand, there is a deep-rooted historical awareness of the past greatness of the Persian Empire and the civilizational contributions Persia/Iran made, especially to the development of the region. Tehran complains that Europe is appreciating neither of these aspects. ⁴¹
Instead, Tehran sees itself to be the subject of harsh criticism over the Iranian engagement in the region. In the Middle East/Mediterranean— especially in Iraq and Syria, but also in Lebanon and Yemen—the Iranian role is oftentimes strongly criticized by European policy-makers, who call for a ‘more constructive’ Iranian position. While the EU and its member states generally acknowledge that Iran’s growing role is a fact, the ways in which Tehran is realizing its influence are causes for concern. In some cases, Tehran even faces calls to entirely disengage from the region. Meanwhile, to Iran it does not appear reasonable to withdraw from the region, giving up the influence it wields, without any meaningful guarantees for its security. ⁴²

More exchanges at the level of civil society: While somewhat less vocally articulated by officials in Tehran, there is a strong desire within Iranian civil society to have more exchanges with Europe. Culturally—both in high and popular culture—Iran is strongly focussed on Europe and the West. While Iranians also acknowledge deep-rooted historical ties with the East, there is great affinity with and or the Occident. ⁴³
Large segments of the Iranian population have a strong desire to enhance exchanges at the level of civil society. These would include, among other sorts of exchange, university co-operation, cultural programmes and tourist visits. For example, the visit of the German pop-music band Schiller in December 2017, which marked the first pop concert in Iran since the 1979 revolution, was greeted enthusiastically by Iranians. The group’s concerts were uniformly sold out, there have been calls to bring the group back to Iran, and a strong desire for more European bands to perform in Tehran is regularly expressed. The same applies to visits by theatre groups: with similar positive reactions, several European and Iranian theatre groups have visited Iran and Europe, respectively. An exhibition in Tehran from the French Louvre museum has, according to Iranian sources, attracted more visitors than the parallel Louvre exhibition in Abu Dhabi, which is significantly larger.⁴⁴

3.4 Co-operation areas with Europe

There is substantial potential for co-operation across a broad range of issues. Obviously, though, the extent to which this potential can be tapped will be a function of the overall political relations between Europe and Iran.

Regional Security
While Europe is concerned with Iran’s role in the Middle East, Tehran believes Europe could play an important role, especially when it comes to mediation efforts between the various regional actors.⁴⁵ Based on this, the EU and its member states could advance dialogue formats on different levels, including through formal diplomatic channels as well as civil society exchanges.
In January 2018, E3 countries (France, Germany, and the UK plus Italy) started a ‘Structured Dialogue’ with Iran on the sidelines of the Munich Security Conference. While the subject then was reportedly the situation in Yemen, the ambition of the E3 plus Italy is to broaden the dialogue to address other, arguably more complicated, regional issues as well.
Obviously, the overall atmosphere for talks has deteriorated due to the harshening stance of the Trump administration. Nevertheless, there should be enough incentives on both sides to meaningfully engage in a broader dialogue on the various issues affecting the Middle East, which are of great importance to both Europe and Iran.
Ideally, any such dialogue efforts would go beyond bilateral European–Iranian relations and also embrace other regional actors. Considering the growing tensions in the Middle East, this would be no simple task for Europe. At the same time, the more tensions increase, the more there is a need for mediation.
Human rights: The human rights situation in Iran is troublesome, and not only to Europe. Effectively, it prevents a further deepening of ties as well as a full-fledged normalization of European–Iranian relations.
From the Iranian perspective, the EU is applying double standards when it comes to human rights. Human rights violations, in the eyes of Tehran, do not seem to complicate Europe’s relations with other countries in the region.⁴⁶
At any rate, the fact that human rights concerns are de facto complicating European–Iranian relations should be reason enough for both sides to enter into a dialogue on this matter. For any such dialogue to be meaningful, it would be important to depoliticize the format in the sense that neither side should seek to utilize the dialogue for any reason other than making progress on the human rights issue itself.
Practically, beyond formal exchanges on this matter, Europe could offer assistance to support reforms in Iran. This could comprise legal advice as well as practical assistance on the implementation of reforms.
Environment: Iran is facing serious environmental challenges. These include chronic air pollution in Iranian cities and industrial centres, increasingly dangerous water supply problems, high energy inefficiency, and repercussions of climate change, such as warmer temperatures and droughts. On various levels, Europe could support Iran in addressing these problems. At the bilateral European–Iranian level, the EU and its member states could provide scientific assessments, including joint European– Iranian research; support the articulation and adoption of appropriate policy measures; and promote technological assistance when it comes to implementation.

Moreover, Europe could promote Iran’s participation in intra- regional exchange formats on these topics. The countries from the region can benefit substantially from the sharing of experiences. In this context, Iran at times finds it difficult to connect to the various regions it is part of and neighbours, i.e., especially the Arab world and Central and South Asia. Europe could assist in bringing Iran into various regional formats.
Economy: After years of sanctions, there are a number of practical obstacles, in contrast to more political factors, which complicate Iran’s full reintegration into the global economy. For example, there are standards in accounting, finance, or due diligence that Iranian companies and banks will need to adopt in order to conduct business internationally—especially with Europe and the West. Here, the EU and its member states could provide technical assistance.

Recommendations

When approaching Iran, Europe’s main challenge is to find an appropriate balance. On the one hand, Europe will need to engage with Iran in light of both the great potential for European–Iranian relations as well as the importance of the country in the Middle East/Mediterranean, Europe’s immediate neighbourhood. On the other hand, the EU and its member states will need to constructively challenge Iran in those areas constituting concerns for Europe: the human rights situation in Iran, certain elements of the Iranian ballistic missile programme, Tehran’s support of non-state actors in the Middle East and the rejection of Israel’s right to exist.⁴⁷
In moving forward, Europe may draw from the successful experience that allowed for the conclusion of the JCPOA. As such, a European approach that seeks to positively link topics in a quest for win-win or more-for-more solutions appears most conducive. In this context, the following comprises a partial list of general policy recommendations.

(1) Fully and comprehensively implement the JCPOA: Not only in light of complaints from Iranian officials and European businesses, Europe should ensure the full implementation of the JCPOA. To this end, Europe would need to further remove nuclear sanctions-related obstacles to European–Iranian trade, especially regarding finance. A full and comprehensive implementation of the JCPOA is the interest of reducing tensions in the Middle East as well as global non-proliferation. Moreover, a successful implementation of the JCPOA would be testimony that diplomacy and negotiations can deliver meaningful results in Iran’s foreign relations. As such, the extent to which the JCPOA becomes a success story will in many respects define the future character of European–Iranian relations.

(2) Enhance and institutionalize political exchanges: Building on the extant positive momentum from the JCPOA negotiations, Europe should enhance and institutionalize political exchanges with Iran on all matters relevant to relations between the two sides. These exchanges would obviously need to take into account both European and Iranian concerns. When it comes to addressing the various concerns, dialogue might be most successful when aiming at the identification of inter-subject linkages, aiming at the creation of win-win or more-for-more outcomes.
The EU–Iran High Level Political Dialogue, which has been held three times since JCPOA implementation, is a constructive starting point. Beyond this important but rather general discussion format, it might be helpful to advance working groups on the various issues important to relations between Europe and Iran. These exchanges would also need to be promoted at the level of EU member states and might benefit from embracing participants from civil society as well.

(3) Enhance and institutionalize the human rights dialogue: The human rights situation in Iran is a great concern to Europe, effectively complicating relations between the sides. Within the above-outlined framework, a constructive dialogue should be held aiming at the identification and implementation of concrete steps to improve the human rights situation in Iran. The human rights issue has been included once again in the European– Iranian official agenda following implementation of the JCPOA. In November 2017, the subject was discussed at the High Level Political Dialogue in Tehran. Considering the urgency of the matter, it is of great importance to institutionalize exchanges on this matter.
To realize positive outcomes, the EU and its member states might link human rights to other areas, where Europe could offer Iran more beyond its immediate obligations (e.g., on economic reform or trade).

(4) Support economic reform in Iran: Since assuming office, the administration of President Hassan Rouhani has introduced numerous economic reforms. Some of these aim at increasing transparency and fighting corruption. Further, Iran seeks to meet the legal and technical requirements to reconnect with the global economy.
Many of these reforms are very much in the interests of Europe. Accordingly, Europe could support the economic reform process in Iran. Whilst offering assistance, Europe could package programmes so as to include further aspects as well, such as improving social welfare or advancing labour rights.

(5) Ease difficulties for civil society exchanges: Throughout Iran, there is great interest in enhancing exchanges with Europe at the level of civil society. Here, bureaucratic barriers imposed by the EU and its member states are effectively hampering progress. Difficulties in obtaining visas especially constitute a stumbling block, in particular when it comes to the Schengen Area.
To promote civil society exchanges and to embrace the full potential for European–Iranian relations, for which civil society exchanges are key, Europe might ease some of the restrictions in this context.

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