European leaders are going to great lengths to revive economic ties with Iran

Thomson Reuters

BRUSSELS (Reuters) - A few months after U.S. President George W. Bush branded Iran part of an "axis of evil" in 2002, the European Union took a different tack and started talks with Tehran to increase economic ties, hoping that business would help rapprochement.

The talks collapsed over Iran's nuclear ambitions, but more than a decade later, the EU looks willing to try again for a pact to capitalize on the historic nuclear deal with Iran that brought an end to U.N. sanctions, officials say.

At a meeting on Monday, EU foreign ministers will broach the subject of how the bloc, once Iran's top trading partner and its second-biggest oil customer, can pursue an agreement on trade, investment and political dialogue despite concerns about human rights and Tehran's role in Middle East conflicts.

"This is just the beginning of a journey," Italian Prime Minister Matteo Renzi told Iranian President Hassan Rouhani in Rome in January, before signing billions of euros of deals in sectors ranging from steel to shipbuilding.

Many in the EU are eager to support signs that Iran, a $400-billion economy, is opening up and to find a new market for European investors facing weak economic growth at home.

The 28-member union is also discussing helping Iran in its stalled bid to join the World Trade Organisation, diplomats say, leveraging the EU's power as the world's largest trading bloc to seek favor with a country sitting on vast gas reserves.

But Brussels is also troubled by Iran's rights record, including more than 1,000 executions last year, and alarmed by its ballistic missiles and its funding of blacklisted militant groups. The Iranian Revolutionary Guards' support for President Bashar al-Assad puts Tehran directly at odds with the West in Syria.

Thomson ReutersOne first step is a planned visit by EU foreign policy chief Federica Mogherini to Tehran in April, her second since the July 2015 nuclear deal and the first with a group of senior commissioners from the EU's executive. A lower level delegation of EU energy officials held talks in Iran last month.

That could be followed by the opening of a permanent EU diplomatic mission in Tehran later this year.

Delicate policy

An EU-Iran cooperation accord would give Brussels a bigger role in market reforms required for Iran to join the WTO. It could help regain some of the business Europe lost to China during the sanctions era and give the EU a legal basis to press for political freedoms in Iran.

A cooperation agreement, the same tool the EU is using to strengthen ties with communist Cuba, is modest but served as a precursor to broader free-trade deals in Central America and Asia, giving duty-free access to the EU's 500 million consumers.

"With Iran, we could go much further than we can with Cuba because Iran is a market economy," said a senior EU official who negotiated on the failed attempt to reach an accord in 2002.

"This would give investors a framework and also a place for dialogue on the things we don't like about each other."

Unlike the United States, which remains deeply suspicious of Iran and is keeping some of its financial sanctions, the EU saw relations flourish during Iran's last reformist era in the late 1990s until revelations about Tehran's nuclear plans in 2002.

The policy is delicate, however, and not just because of Iran's unique dual system of Islamic and republican rule.

Thomson ReutersEurope wants to avoid alienating Saudi Arabia, Iran's biggest rival and a U.S. ally, and may send one of its most senior foreign policy officials, German diplomat Helga Schmid, to Riyadh when Mogherini goes to Tehran, diplomats said.

Saudi Arabia, alarmed over Iran's coming in from the cold, has sought to deflate hopes that Tehran would be a bonanza for foreign investors. But that has barely registered in Paris and Rome, where Rouhani led his 120-member delegation of business leaders and ministers in January.

At home, EU governments are divided on how quickly to move.

Italy, where the economy continues to struggle after a three-year slump wants to rebuild the lucrative relationship it enjoyed before U.N. sanctions were imposed on Iran in 2010, when it was Iran's largest European trade partner.

Britain and France are also keen to do business, but have been outspoken in condemnation of Iran's military support for Syria's Assad and are skeptical of the country's other Middle East interventions, such as Yemen.

British Business Secretary Sajid Javid said on Wednesday that Britain's export agency had signed a deal with Iran making it easier to finance trade. Javid said he was working with EU counterparts to ease banking problems that were "quite significant" barriers to economic ties with Tehran.

Continuing U.S. restrictions on dollar finance and sanctions on some Iranian entities are deterring European banks from financing deals with the Islamic Republic.

Germany and Sweden have misgivings over Iran's human rights record, which the United Nations described last year as "deeply troubling". Iran bridles at such criticism, rejecting a U.N. report last year as a case of double standards by the West.

"Europe needs to win Iran over, to show it wants to help," said Majid Golpour, an Iran expert at Brussels' ULB university. "It won't get far in Iran lecturing about human rights."

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