1. Thread. The US and Europe may be plunged into a massive fight over Iran sanctions. When the US pulled out of the JCPOA with Iran - and threatened allies if they continued to do do business with Iran, it started a process that might lead to the unraveling of US financial power.

2. This is the product of a complex - but crucially important - power struggle over what @ANewman_forward and I have dubbed "weaponized interdependence" - for the background to what is happening right now, see our forthcoming article in @Journal_IS dropbox.com/s/27mnqcxrxwap… .

3. But what you need to understand is three things. 1 the US was incredibly successful in weaponizing the global financial system for its own purposes. 2 It succeeded in large part thanks to acquiescence & support of its European allies. 3 The Trump administration has trashed 2.

4. As Abe and I argue, most people who think of sanctions at all, think of them as ways that one country puts pressure on another, by blocking access to its markets. That misses out on a lot of what modern sanctions do. They often involve indirect leverage rather than direct.

5. Thus, for example, highly effective US "secondary" sanctions have leveraged the global financial system in order to put pressure on third countries. The US has not only sanctioned Iran by blocking access to US markets - it has penalized non-US firms doing business with Iran.

6. One of the reasons it has been able to do this is the dollar clearing system. The international financial system relies on the dollar (and hence US banks) to clear most significant international financial transactions. This gives the US a lever.

7. Another reason is SWIFT - an international financial messaging system based in Belgium but heavily influenced by the US. Without access to SWIFT, it is again really hard to carry out global financial transactions. Dollar clearing allows the US to discipline non-US banks

8. which need access to it, while SWIFT allowed the US and the EU to effectively isolate Iran from international financial system in lead up to the JCPOA. Restoring SWIFT access was one of the key negotiation goals of Iran. This has in part worked because EU went along with US.

9. The EU (esp. while UK still a member) is the only other entity with regulatory tools and clout to shape international financial system. But the US and EU have mostly seen eye-to-eye in the past. That is what has potentially changed after the US pullout from the JCPOA.

10. The current administration believes that it can continue to weaponize the international system even without European support - and that it can indeed weaponize the system against European allies if they resist. It effectively obliged SWIFT to agree to isolate Iran again

11. even though the EU didn't want it to. And it continues to use control of dollar clearing and access to US markets to threaten European banks with vast fines if they facilitate transactions that involve Iran. So the key question is: will Europe knuckle under or resist?

12. This is a real dilemma for EU foreign policy elite, which has continuing strong Atlanticist inclinations, especially in Germany. But Germany's foreign minister has started pushing for a more independent European approach, including on SWIFT - handelsblatt.com/meinung/gastbe…

13. Many in France agree. And this explains where we are now. The EU, with some trepidation, is creating a "Special Purpose Vehicle" (SPV) which would allow payments to Iran, over strenuous US resistance (and with some internal worries too given Iranian assassinations on EU soil)

14. See apnews.com/3b0a2c6448274c… for a good summary. Republican senators like Cotton and Rubio are implicitly threatening counter-action, egged on by the so-called "Foundation for the Defense of Democracies" (which despite name is A-OK with friendly Middle East dictators).

15. This SPV is at most going to be a baby step towards international financial structures that would give the EU more independence. But people associated with the Trump administration would surely like to strangle it in its cradle. A US meeting co-hosted with Poland is likely to

16. try to limit and undermine the initiative - but it looks as though the other major European states are determined to push it through. This is likely to lead to an enormous political battle, where both sides have a lot to lose.

17. The EU is for obvious reasons immensely distrustful of a US administration that has shown that it doesn't particularly care about its allies' economic interests, and is at best questionably inclined to take their security interests seriously.

18. But it also is heavily invested in a dense network of information exchange and relations over financial data with the US, that it is loathe to give up. Hence, it is not initially likely to do more than establish an institution that gives it beginnings of a fallback option.

19. The US has a lot to lose if others start to defect from the system it controls - and as Jack Lew argued as Treasury Secretary and is likely to argue in a forthcoming address - atlanticcouncil.org/events/upcomin… - this might happen if the US loses the run of itself.