Israel fears economic squeeze by Europe ahead

BRUSSELS—As Middle East peace talks founder, Israeli leaders are bracing for the European Union to resume its effort to put an economic squeeze on Israeli settlements in the West Bank and other disputed territories that the EU considers illegal.

The EU had been working on a guideline that would prevent goods manufactured in settlements from carrying a “Made in Israel” label. The 28-member bloc also had been drafting a list of potential legal risks for European companies doing business in the territories—a list that might cause some to rethink their operations.

Such measures were effectively put on hold when Israeli and Palestinian negotiators began talks last summer, though EU officials say work on them has continued. With the talks now suspended, and the April 29 deadline for extending them past, Israeli officials fear the EU will pick up where it left off.

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“We’re already hearing about such initiatives, and we understand that it is in the drawer and waiting for someone to pull it out,” David Walzer, the Israeli ambassador to the EU, said in an interview. “Am I worried? Yes. Do I think it’s something they will definitely do? I hope not.”

Head of the Hamas government Ismail Haniyeh and Senior Fatah official Azzam Al-Ahmed (L) attend a news conference as they announce a reconciliation agreement in Gaza City April 23, 2014. REUTERS/Suhaib Salem

He added, “I hope they understand this can be destructive for the efforts to revive the peace process in the near future.”

Hanan Ashrawi, a prominent Palestinian legislator, said the EU should resume the labeling push. “It’s long overdue—it should have happened decades ago,” she said.

EU foreign ministers plan to issue a statement on the Mideast talks when they meet in Brussels on Monday. Its tone and content are still being discussed, but one diplomat said it would call on both sides to rededicate themselves to negotiation and re-emphasize the benefits of peace.

U.S. Secretary of State John Kerry took the lead in bringing Israelis and Palestinians together for the talks, with European leaders largely on the sidelines. But they have sought to exert economic leverage on Israel through their extensive financial and trade ties.

Shortly before the talks began, for instance, the EU announced guidelines to ensure that no EU funding would go to organizations with links to the Israeli settlements, angering Israel.

With the talks under way, the EU promised “unprecedented” economic benefits for both sides if they reached a deal. The U.K. and France, among others, pushed unsuccessfully for the EU to spell out specific benefits, arguing that would increase the EU’s ability to influence a deal.

At the same time, individual countries, including Britain and Denmark, have move to impose their own voluntary labeling scheme for products from the territories.

EU officials have publicly played down the import of some of these moves, saying they flow from the EU’s long-standing position that Israeli settlements in the West Bank, as well as those in the Golan Heights and East Jerusalem, are illegal. Israel captured those territories in the 1967 Middle East war.

As the talks hit turbulence last week, Catherine Ashton, the EU’s foreign policy chief, called on both sides to show restraint. “Negotiations are the best way forward,” Baroness Ashton said. “The extensive efforts deployed in recent months must not go to waste.”

Israeli officials criticized that statement, saying the talks stalled because Fatah, the largest Palestinian faction, announced it was reconciling with Hamas, which the U.S. and EU label a terrorist group and which doesn’t recognize Israel’s right to exist.

“Overall, I would have expected a stronger statement, putting the onus on the Palestinians and not calling on both sides to refrain from taking unilateral steps,” Mr. Walzer said. He added that Israel is taking a wait-and-see attitude on further talks, depending on what kind of unity government is formed by Palestinian leader Mahmoud Abbas.

The Palestinians say Israel was simply seeking an excuse to end the talks. Many figures in the Israeli government hold views objectionable to Palestinians, Ms. Ashrawi said, but that didn’t cause Mr. Abbas to end talks.

EU officials say they are not likely to make any immediate moves, and that their greatest hope is that negotiations revive. But if the talks appear doomed, some EU members are arguing that it should mark a turning point in EU-Israel relations, according to one person familiar with the matter.

Most Europeans are mindful of the long history of Jewish persecution in Europe, and close ties between the EU and Israel have long been seen as a given.

Still, the EU’s 28 members vary in degree of support. Some countries, like Germany, Netherlands and the Czech Republic, are strong defenders of Israel, while others, such as Sweden, Denmark and Ireland, can be relatively more critical. That reflects European history as well as differences in public opinion.

In some places, a “Boycott, Divestment and Sanctions” movement has sprung up to pressure Israel on its handling of the territories.

EU leaders say they don’t support that movement. But Israeli officials say the EU will bolster it nonetheless if it presses ahead with initiatives like West Bank labeling.

“We are calling on everyone to be very cautious, very careful, and not to rush into efforts that can only hurt the efforts” at peace, Mr. Walzer said.