Europe’s economic leverage against Israel

[MIDDLE EAST] For nearly two decades, Europe’s approach to Israel has been defined by caution, division, and a reluctance to impose meaningful consequences for violations of international law. But as the humanitarian catastrophe in Gaza deepens—with more than 54,000 Palestinians killed, starvation stalking infants, and Israeli officials openly discussing reoccupation and expulsion—the EU is finally being forced to reckon with its own complicity. The question is no longer whether Europe should act, but whether it can marshal the political will to do so. Recent moves, especially the review of the EU-Israel Association Agreement, signal a potential inflection point: Europe may now be ready to use its considerable economic leverage to pressure Israel toward restraint and accountability.

The Slow Awakening: From Rhetoric to Review

Europe’s awakening to Israel’s actions in the occupied territories has been slow, uneven, and deeply uncomfortable. For much of the past 20 months, European leaders have issued strong statements about the importance of international law and the two-state solution, but have largely failed to back up their words with action. The EU’s foreign policy has been criticized as a “paper tiger,” with structural obstacles—such as the need for unanimity on major decisions—preventing decisive steps.

Yet, as the scale of suffering in Gaza became impossible to ignore, a minority of European countries—Spain, Ireland, Slovenia, and Norway—took a principled stand, recognizing Palestine as a state and supporting international legal proceedings against Israel. At the other end of the spectrum, countries like the Czech Republic, Hungary, Germany, and Italy have continued to offer robust support to Israel, with Hungary even inviting Israeli Prime Minister Benjamin Netanyahu to Budapest despite an ICC arrest warrant and subsequently leaving the court altogether. The silent majority of EU states, however, has been caught in the middle, reluctant to break with Israel but increasingly uneasy with the status quo.

Now, the tide is turning. The UK has suspended negotiations on a new free trade agreement with Israel, France is hinting at targeted sanctions, and the EU itself is reviewing its association agreement—a move that would have been unthinkable even a year ago. The review, mandated by the EU’s High Representative for Foreign Affairs, Kaja Kallas, is based on Israel’s alleged violations of the agreement’s human rights clause, and was initiated not by traditionally pro-Palestinian countries, but by the Netherlands, a longtime ally of Israel. This suggests a realignment of European priorities, driven by both moral revulsion and a growing recognition that inaction is undermining Europe’s credibility on the global stage.

The Economics of Leverage: What’s at Stake?

The EU is Israel’s largest trading partner, accounting for 32% of Israel’s total trade in goods and more than €45 billion in annual trade flows. Israeli exports to the EU are dominated by high-tech products, pharmaceuticals, and chemicals, while the EU exports machinery, vehicles, and electronics to Israel. This deep economic interdependence has long insulated Israel from international pressure, but recent developments suggest that this may be changing.

Suspending the preferential trade provisions of the EU-Israel Association Agreement would not require unanimity, but rather a qualified majority of member states representing at least 65% of the EU population. While this is still a high bar—especially if Germany and Italy remain opposed—the fact that 17 countries backed the review suggests that the political winds are shifting. Even a partial suspension of preferential trade would deprive Israel of tariff exemptions and other benefits, raising costs for Israeli exporters and potentially disrupting supply chains in key sectors like technology, chemicals, and defense.

The economic impact would be significant, but not catastrophic. Israel’s economy is resilient, and its tech sector in particular has continued to grow despite the war. However, the loss of preferential access to the EU market would hurt Israeli exporters, reduce foreign investment, and undermine Israel’s international standing—especially if other countries follow Europe’s lead. For European firms with exposure to Israeli markets, the risks are also real: sectors like defense, technology, and chemicals could face supply chain disruptions, reputational damage, and lost business opportunities.

Forecast: Will Europe Act—and What Comes Next?

The review of the EU-Israel Association Agreement is a necessary first step, but it is not sufficient on its own. For the review to lead to meaningful action, the EU will need to overcome its internal divisions and muster the political will to impose real costs on Israel. This will require at least one of the major holdouts—Germany or Italy—to shift its position, a prospect that is still uncertain but not impossible.

Germany’s longstanding commitment to Israel’s security as a matter of national principle (Staatsräson) has made it a reliable defender of Israel in European forums. However, even in Germany, criticism of Israel’s actions in Gaza is growing, and Chancellor Friedrich Merz has recently declared that he can no longer justify Israel’s conduct. If Germany were to join the majority in favor of suspending preferential trade, the population threshold for a qualified majority would likely be met.

Italy, under its far-right government, has given no indication of a policy shift, but public opinion in Europe is increasingly turning against Israel’s actions, and the pressure on governments to act is mounting. If the review process documents clear violations of international law—as is widely expected—the political calculus for inaction will become even more untenable.

Looking ahead, the suspension of preferential trade would not end the war in Gaza overnight, but it would send a powerful signal to Israel and the international community that Europe is finally willing to impose a price for violations of international law. It would also create a precedent for other countries to follow, and could help to rebalance the international playing field in favor of a negotiated two-state solution.

What We Think

Europe’s belated awakening to the catastrophe in Gaza is a sign of both moral crisis and political opportunity. The EU’s review of its association agreement with Israel is a necessary and long-overdue step, but it will only matter if it leads to concrete action. Suspending preferential trade would not be a panacea, but it would be the first meaningful consequence imposed by the international community for Israel’s documented war crimes and violations of international law.

The economic stakes are real, but the moral and strategic imperatives are even greater. If Europe fails to act now, it risks not only complicity in ongoing atrocities, but also the erosion of its own credibility and the collapse of the rules-based international order it claims to uphold. The time for half-measures and empty rhetoric is over. Europe must use its economic leverage to pressure Israel toward restraint and accountability—not just for the sake of the Palestinians, but for the future of international law and the integrity of Europe itself.