The EU signed and enacted a trade deal with Israel in 2000. It has proved highly successful, with total trade between Israel and the EU reaching €42.6bn (£37bn) in 2024. But at the heart of this agreement lies a human rights clause that Israel is obliged to respect. (It’s worth revisiting my First Edition on how the peace process between Israel and Palestine opened up Israel’s economy while devastating Palestine’s.)
Earlier this year, Israel imposed a full blockade on Gaza, banning all humanitarian goods from entering the strip. That move prompted the Netherlands to launch an audit to assess whether Israel was complying with its human rights obligations. The EU concluded that Israel had breached those obligations in Gaza and the West Bank. In July, the bloc’s foreign policy chief, Kaja Kallas, said the EU could consider “further measures”. Yet, it’s now September and meaningful change has yet to happen.
Until, perhaps, now. Yesterday, the European Commission formally proposed suspending free-trade arrangements on Israeli goods over the war in Gaza.
“If this package goes through, it would be the most significant international action taken against Israel,” Julian Borger told me.
“It will be hard for Israeli leaders to ignore it. The arrest warrants from the International criminal court and recognition of Palestine are symbolically important, but a limitation of the EU association agreement would be meaningful. The EU as a bloc is Israel’s biggest trading partner.”
Super Sparta of the Middle East
Israel’s prime minister, Benjamin Netanyahu, sparked alarm when he warned the country to prepare for mounting economic isolation. In his speech, Netanyahu painted a grim picture of Israel’s trajectory: a more heavily militarised society, but also a pariah state. He said Israel would become a “super Sparta” of the Middle East.
The speech was followed by Israel’s long-promised ground invasion of Gaza City. “The operation is pointless because they did not put any checks on the road going south, from Gaza City to al-Mawasi. So anyone could have gone down the road. It was, on the face of it, an exercise in futility. But, if the aim is to make Gaza uninhabitable, then it was quite effective,” Julian said.
When Netanyahu invoked the image of Sparta he perhaps wanted to convey strength – but spartan has another meaning: frugality. An unintended consequence of the incursion will be the impact on Israel’s finances. Unsurprisingly, stocks on the Tel Aviv stock market took an immediate dip after Netanyahu’s super-Sparta speech, and the shekel fell against the dollar.
“In response to the speech, 80 Israeli economists put out a letter that essentially said: ‘We’re going into the economic abyss with this war.’” Julian said.
Netanyahu hit back with claims the Israeli economy is resilient and strong. “I think it’s kind of hollow. The long-term trend is people who are qualified are leaving all the time. They are spending huge amounts on this war. In terms of government finance, they’re in a lot of trouble,” Julian explained.
Divisions within the EU
The EU has been threatening further action against Israel for several years. The problem is that the member states cannot agree on what that action should be.
Julian explains that the current proposed suspension of the trade agreement involves two phases. The first is a vote among the commissioners, which is likely to pass. “Then there’s a second vote, where they need to get it through with a majority of EU member states. That’s a lot harder. Germany and Italy have been the major holdouts. If one of those switches, then it passes.”
While a spokesperson for Germany’s government said it has not yet decided on its stance toward EU proposals, it’s hard to see the country voting against Israel due to its historic ties. “If there’s a vote, it could be all about Italy. If it passes it would be huge. It’s true that nothing matters except America when it comes to arms supplies, but when it comes to the economy, the EU is the big player.”
The declaration from the UN that Israel is committing genocide in Gaza will have an impact on deliberations, Julian added. “For example, when we were writing stories, we said ‘UN legal experts say this is a genocide,’ but once you say ‘UN report [says it]’, it makes a lot of difference. So yes, they felt that report here in Israel.”
The Israeli people v the Israeli government
Would the suspension of the trade deal force Netanyahu and his coalition to immediately change course? Julian isn’t sure. “The coalition will stick together because they want other things. The religious and nationalist right don’t care much about the economy because their priorities are political and religious. Netanyahu will do everything possible to keep them together.”
But, Julian added: “The centrist constituencies would feel the pain so maybe a coalition partner could pull out.”
A spiralling economy would also give new impetus to the growing anti-war movement in Israel. “You’d probably get a lot of protests on the streets. The Labour Federation would probably come out with strikes to pressure Netanyahu, who will try to hold on until 2026.”
So far that pressure from the protests has not worked. But Netanyahu’s panicked response to drops in the Israeli stock market suggests he may not truly believe in his apocalyptic “super Sparta” vision, and that rapid economic shifts could yet prove to be his achilles heel.
