President Donald Trump announced Tuesday that the United States would unilaterally pull out of the Iran nuclear deal or the Joint Comprehensive Plan of Action (JCPOA). Trump has been signaling that he would revoke the United States' participation in the deal throughout the election cycle and he followed through on his promise a year after his inauguration.
The implications of this announcement for financial markets and global investors are wide ranging. At this point nearly all U.S. sanctions will be reimposed by November of this year, with many beginning to take effect in August. Whether the EU will join with the U.S. is, as of yet, uncertain.
In the run-up to a finance conference in Sarajevo this week I had an opportunity to do some traveling in the Balkans. Ironically Trump's announcement comes as I travel in a region scarred by war yet simultaneously trying to move past old tragedies. I had previously visited Bosnia, but this was my first comprehensive visit of the neighboring countries including Croatia, Montenegro and Albania.
In short, despite nearly completely ignoring the death and devastation that the war in Bosnia generated in the early ‘90s, the Europeans have figured out that war in Europe is ultimately a bad thing. To this end they have begun a policy of financial incentives to keep these countries and peoples from returning to war.
Both the Croatian kuna and the Bosnian convertible mark were pegged to the German Deutsch mark and later to the euro per the Dayton peace accords. Montenegro enjoys being part of the eurozone outright.
The euro peg of Croatia and the Bosnian federation is undoubtedly supported by the European Central Bank (ECB). This implied support may not cost the ECB any actual funds but the threat of intervention in protecting the peg is more than enough to keep it from deviating from the peg. The backing of a strong currency means very effective fiscal policies, cheap energy and import costs, higher standards of living and overall general fiscal well-being.
In addition to supporting the currency pegs, the EU provides hundreds of millions of dollars in direct funding to all the countries. Essentially Germany and France have decided they would rather spend some funds in keeping life livable for the Balkan Europeans in the Balkans rather than have to support them as immigrants.
This policy has largely worked. Not only is this good for the Balkans, it also provides much needed inflationary pressures on the deflation prone euro. A minuscule amount of de facto quantitative easing in return for the prevention of the outbreak of war? Sounds great to me.
While traveling the Balkans, this was the takeaway for me. The Dayton Accords were very much majorly flawed. Dayton came nearly four years after the war began and before hundreds of thousands of Bosnia Muslims were ethnically cleansed from parts of the former Yugoslavia.
Wherever I went, Bosnians told stories of how their villages were attacked, their mosques either razed or damaged, and relatives they had lost during the war. I watched videos of the war while visiting a tunnel the Bosnians had built under the Sarajevo airport. The war was just as brutal as I remember it.
Twenty-five years later, ethnic strife is still very much alive in the Bosnian federation. Borders were redrawn so as to balance out ethnic populations while keeping former enemies living side by side. No one ethnicity controls the government making them all interdependent. While everything appears calm on the surface, in reality the region is a powder keg.
Despite this, this interdependence coupled with relative financial prosperity has allowed the people of this region to focus on building a future for their children instead of settling scores and this is by design. The EU doesn't want war and instability on its door step and is willing to pay to impose that peace.
The Iran nuclear deal similarly took the wind out of the sails of Iranian hardliners and allowed for investments to return to the country. With Trump reversing these actions, those in favor of nuclear development will now say, "We told you they couldn't be trusted." This will only embolden those already in power and weaken the Iranian people. Trump's actions will not weaken the Iranian regime, it will strengthen it.
The only way Trump's announcement doesn't end in a complete financial disaster and potential war is if the EU decides to abide by the deal and continue trading with Iran in exchange for disarmament. The fate of financial markets and the people of the region will be sealed in the coming days.