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This week's bitter dispute between Europe and Israel, explained

EU Foreign Policy Chief Federica Mogherini with Israeli Prime Minister Benjamin Netanyahu.
EU Foreign Policy Chief Federica Mogherini with Israeli Prime Minister Benjamin Netanyahu.
Jim Hollander/AFP/Getty Images

It's been a bad couple of days for relations between Israel and the European Union. On Sunday, Israel announced that it would suspend contact with EU diplomats working on the Israeli-Palestinian peace process. It threatened to go further on Monday morning: Israeli officials warned that Jerusalem might stop helping the EU's economic projects in the West Bank, making it hard for the EU to serve its Palestinian beneficiaries.

This is retaliation, pure and simple. On November 11, the EU set up guidelines requiring all Israeli products produced in West Bank settlements to be labeled as coming from a settlement rather than from Israel proper. Israel believes this rule will further enable boycotts of Israeli products, which it sees as a threat to both its economic livelihood and — even more important — its legitimacy in the eyes of the international community.

The economic stakes here aren't that high for Israel: Settlement-made goods are a tiny percentage of Israel-EU trade. But there's a bigger dispute underlying here: The EU and Israel disagree, fundamentally, about how to handle Israel's continued occupation of the West Bank. And as long as that disagreement exists, the relationship between Israel and its largest trading partner will be fraught.

Where the labeling fight came from

Israeli Deputy Foreign Minister Tzipi Hotovely at a plastic factory in the West Bank.
(Menahem Kahana/AFP/Getty Images)

The roots of the current dispute go back to 2012, when a declaration signed by every EU member state's foreign minister committed the entire European Union to labeling settlement-made products. Previously, they were listed as "made in Israel"; the new rules would require them to instead be marked in some way as coming from an "Israeli settlement."

The rationale behind the move was clear: The European Union sees Israel's West Bank settlements as illegal Israeli expansion rather than part of the recognized boundaries of the state of Israel. EU leaders thought labeling settlement-manufactured goods as "made in Israel" was both misleading and an implicit endorsement of the view that settlements were part of Israel.

"The EU and its Member States have a clear position on Israeli settlement activities in the occupied territories," then–EU High Representative for Foreign Affairs Catherine Ashton wrote in a 2013 letter. "Closely linked to this [is] the question of ensuring the correct labeling of imported products originating beyond Israel’s pre-1967 borders that are marketed as Israeli products."

But product labeling couldn't begin immediately, as the European Commission (EC), the EU's equivalent of an executive branch, needed to issue guidelines on how the product labeling would work. Pressure from Israel and the United States, which was at the time pushing Israeli-Palestinian peace negotiations, caused the EU to hold back.

US-led peace talks collapsed in April 2014 and have appeared dead in the water ever since. Absent concerns about disrupting the peace process, the EU was free to go forward with the product-labeling plan. After a series of internal deliberations, the European Commission issued the final guidelines on settlement labeling on November 11, 2015.

It's still not clear exactly what the labels will look like, and it could vary from country to country (the Times of Israel's Raphael Ahren has a pretty detailed breakdown on why, if you're curious).

But Israel is furious. "The EU should be ashamed," Prime Minister Benjamin Netanyahu said. Justice Minister Ayelet Shaked called product labeling anti-Semitic, terming it "an anti-Israeli and anti-Jewish decision." There is indeed a nasty tradition of singling out Jewish-made products for exclusion from European markets, though there are obvious differences between settlement labeling and, for example, Nazi restrictions on Jewish businesses.

Just two weeks after the EC issued its regulations, Israel suspended communication with EU officials on the peace process. This isn't actually a big deal: The peace process isn't going anywhere, and Israeli officials can still communicate with individual EU countries such as the UK and France. Moreover, the rule isn't categorical: Netanyahu met with EU foreign policy chief Federica Mogherini at the ongoing UN climate change summit, illustrating that Israel is willing to make exceptions if something important is at stake (like, say, peace talks looked likely to resume).

It would be a somewhat bigger deal if Israel actually followed through on its threat to suspend cooperation with EU economic projects in the West Bank, as that would deprive Palestinians of about $10.5 million worth of European investments.

So far, that's still just a threat. But the rhetoric coming from Israeli authorities is pretty heated.

"We will need to re-examine whether it is feasible to consider the European Union as a partner while it is using measures of discrimination and boycott against the State of Israel," Israeli Foreign Ministry spokesperson Emmanuel Nahshon said.

Why this is a big deal

A demonstrator in Barcelona calls for a boycott of Israel.
(Albert Llop/Anadolu Agency/Getty Images)

The settlement labels themselves are not a major threat to Israel. According to Reuters, Israeli economic officials believe the labels are likely to cost Israel about $50 million in trade per year as a result of voluntary boycotts by EU citizens. Total EU-Israeli trade, for perspective, is around $30 billion per year.

"From an economic point of view this is a nonissue," David Simha, president of the Israeli-Palestinian Chamber of Commerce and Industry, told the Wall Street Journal. "The numbers are so small it will not affect business."

The real issue, rather, is symbolism — and a slippery slope. From the Israeli point of view, most of the settlers living in the West Bank are Israeli citizens living there in accordance with Israeli law. Until a peace deal is signed — and Israel blames the lack of peace on Palestinian incompetence and recalcitrance — they deserve the same protections as other Israelis.

Singling out settlers, Israel's leaders believe, is merely a first step toward targeting Israelis more broadly — especially in Europe, where popular opinion tends to favor the Palestinians. Given that there exists a global movement to boycott all Israeli-made goods, known as the BDS (boycott, divest, and sanction) movement, Israel thinks there's a real chance its relationship with its most significant trading partner (the EU as a whole accounts for more Israeli trade, in dollars, than any single country) could be at risk.

The EU sees things differently. The EU's stance, as European authorities have said repeatedly, stems from its fundamental view that Israeli settlements in the West Bank are illegal, immoral, and a barrier to ending Israel's occupation of the West Bank.

"There is no evidence that the European Union’s policies and actions with regard to settlements are based on the actions of the BDS movement," Matt Duss, president of the Foundation for Middle East Peace, said in congressional testimony in July. "On the contrary, it is the collapse of the peace process, the deepening of Israel’s occupation and the possible foreclosure of the two-state solution that have motivated these European moves."

It's this disagreement over the status of the settlements that's at the core of the current anger over settlement product labeling. And even if Israel-EU tensions over the labels specifically subsides, the fundamental issue complicating their relations will remain.