The quiet diplomatic threat is becoming a serious one. This week Channel 13 reported that two Western diplomats had confirmed the EU has quietly been building a suite of sanctions against Israel which would be imposed as soon as bulldozers start rolling on the E1 corridor, the land that lies in the West Bank between Jerusalem and the settlement block of Ma'ale Adumim. The list which is said to go further than the narrower labeling rules Brussels has implemented since 2015 covers blanket labeling of all Israeli products, no matter where in Israel they were made, a restriction on academic cooperation and a suspension of some security and diplomatic ties between the bloc and Jerusalem.

That is a distinction that's important a great deal. EU policy has been firm on the issue for ten years, and in a significant decision in 2019, the European Court of Justice decided that goods made in the region of the settlements had to be labelled as such when sold in the EU, an opinion which ruled out broader boycotts of Israel. The reported package would be the first to include goods from within the pre-1967 lines in the same enforcement basket as goods from Judea and Samaria something that would go far beyond the current EU doctrine.

The issue is the tender to build seven residential compounds and 1,234 housing units in E1, part of a plan to build around 3,400 units the government approved a year ago. The project has long been advocated by Finance Minister Bezalel Smotrich, who at the time referred to its expansion as an "end of the possibility of Palestinian statehood". E1 serves as the geographical crossroads of the two-state plan for both planners and diplomats: development there would cut off East Jerusalem from Bethlehem and Ramallah, eliminating the possibility of a continuous Palestinian state. That's how it has languished for nearly two decades for successive American governments to come and go, but this government has brought it back.

European capitals gave a quick and forthright reply. The four countries this week gave a joint warning to companies bidding for the construction tenders that such actions may involve them in lawsuits and damage their reputations due to international law violations. Belgian foreign minister has said the tenders were unacceptable and it would make any possibility of a two-state solution "a matter of history". Britain's foreign secretary went a step further, saying the plan was “destructive” and that concrete steps would follow, with Britain summoning Israel's charge d'affaires for a formal rebuke.

The criticism of Jerusalem did not go down without a fight. Foreign Minister Gideon Sa'ar reacted to the British statement by saying that it was patronizing and that the Jews have a right to live across the land of Israel as much as the Britons have a right to live across the United Kingdom. He also claimed that years of western governments blaming Israel for everything has resulted in the increase of antisemitic attacks against British Jews. Smotrich and National Security Minister Itamar Ben Gvir took the issue much further, declaring the settlement drive to be a matter of national survival and that it would be “unacceptable” for foreign investors to object to it, and deriding the notion that a colonial era mandate from 1948 has any relevance in the current foreign policy landscape in London.

Denude the rhetoric and the economic implications are significant. By far the biggest partner is the EU, which is Israel's top trading partner, followed by the United States. Last year, goods trade between the two sides totalled approximately €43.3 billion, of which approximately €28 billion was exported from the EU to Israel and approximately €15.3 billion was exported from Israel to the EU. Both exports and imports of machinery, transport equipment and chemicals are well over half of the trade that crosses the border. About a third of Israel's total external trade passes through EU member countries, and any significant disruption, even if it isn't an actual tariff, would cause reverberations in export-heavy areas such as the auto industry, pharmaceuticals and precision manufacturing, which are dependent on European customers.

That imbalance is also the reason why analysts in Israel have been wary of the extent to which Brussels can go. The EU exports more to Israel than it imports, and, as such, is not very keen on actions which may affect its own exporters. In contrast to a tariff wall, a blanket labelling regime is easier to impose from an administrative point of view and diplomats cited in the regional reporting indicate that it is more of a gesture of political punishment than a complete rupture. Yet despite the fragile currency situation and the fact that Israel's state budget is already strained by three years of war spending, even a change in labelling carries reputation risks for European retailers and defence institutional buyers, who have become more sensitive to where their goods come from since 2023.

There's a timing aspect few are openly declaring. European officials are said to be concerned that rolling out sanctions before the election would be a political boon for Netanyahu's government, which would be able to claim that it isn't reacting to settlement policy, but to Brussels.Some European officials are said to be concerned that rolling out sanctions before the election would be a political boon for Netanyahu's government, which would be able to claim it isn't reacting to settlement policy, but to Brussels. The result could be why the measures are still a contingency plan and not a declared policy loaded on Brussels' desk awaiting the first excavator in E1.