I don’t think sanctions on Israel are imminent, but things can change quickly in times of war

In the 1990s, when the Oslo peace process was in its incipient optimistic phase, I was the Israel economist for the large Swiss bank, UBS. International investment money, which had largely been absent in Israel, was flowing into Tel Aviv. My job was to analyse the Israeli economy for UBS and its investors, explaining where the opportunities might exist and estimate the gains to both the Israeli economy and putative West Bank-based Palestinian economy of future peace and openness. Hard as it is to imagine now, back then Palestinians and Israelis travelled back and forth across the Green Line, marking the 1967 borders. I spent most of my time in a suburb of Tel Aviv called Ramat Gan, predominantly home to Iraqi Jews who in 1948 were expelled from Baghdad where they had lived for centuries. Evenings passed chatting with these local people, first- and second-generation Jewish refugees, gave me a sense of how they saw the world.
As psychologists say, hurt people hurt.
Thirty years ago, the Israeli economy was beginning to transform itself from a quasi-socialist, inward-looking, second-rate entity, traumatised by hyperinflation, into the high-tech, high finance, trading machine it is today. The arrival of hundreds of thousands of well-educated, technologically sophisticated Soviet Jews in the early 1990s changed the engineering DNA of Israel. These people became the intellectual raw material for the subsequent boom in Israeli high-tech documented in the best-selling book Start-Up Nation: The Story of Israel’s Economic Miracle.
In the course of my research and as I got to know many local economists, policymakers, manufacturers and commentators, the dependency of the Israeli economy on the EU became increasingly apparent. America might well be Israel’s protector but Europe is its bread and butter. Over the past 30 years, this fact has not changed much. It has been regularly observed that economics is geography in the sense that countries tend to trade with those nearest to them, a detail overlooked by Brexiteers across the water. In the same way as Britain predominantly trades with Europe because the EU is the big trading block in the region, Israel too is highly dependent on its trade with the EU.
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The EU is by far Israel’s largest trading partner, accounting for 28.8 per cent of total trade in goods. That is almost double its trade with the US, its second largest partner (15.6 per cent). Just under a third (31.9 per cent) of Israel’s imports come from the EU, while a quarter (24.3 per cent) of the country’s exports are bought in Europe. By way of contrast, the US makes up just under one tenth (9 per cent) of Israel’s imports and about a quarter (25.6 per cent) of exports. As an economic partner, Israel represents a minnow for the EU, ranking as the EU’s 25th biggest trade partner and just 0.8 per cent of the bloc’s total trade in goods in 2022.
There is a profound asymmetry in commerce between Israel and the EU. Total trade in goods between the EU and Israel in 2022 amounted to €46.8 billion – a pittance for the EU, but colossal for Israel. Throw in the trade in services between the EU and Israel which amounted to €16.7 billion in 2021 and it’s not hard to see Israel’s extraordinary economic reliance on the EU. Indeed, trade between Ireland and Israel alone topped €4 billion last year.
In international commerce, size matters. The big guys are rule makers and the little guys are rule takers, which is why it is always essential for small countries to negotiate at the table as part of a bigger bloc. If you are not at the table you are likely to be on the menu. When nationalist Israeli politicians disparage and insult the EU, while fawning over Washington, their own industrialists must wince. To paraphrase the former German chancellor Willie Brandt, for the Israelis, politically the EU might well be a pigmy but economically it is a giant – and one that, if it chose to do so, could stop the Israeli economy in its tracks.
This brings us to the issue of sanctions against aggressor nations, such as the Serbs in 1992 or the Russians in 2022, or indeed the South Africans in 1985. In each case, the sanctioned nation saw itself as a victim, misunderstood by the world, vilified unfairly and ultimately the wronged party in a highly volatile local situation. This endless “whataboutery” mattered little; ultimately the rest of the world saw heavily armed soldiers killing defenceless civilians, whether they be vulnerable Bosnians cowering under siege in Sarajevo, Africans in Soweto or Ukrainians in Mariupol. This is the road down which Israel is travelling.
Just to be clear, I don’t think sanctions on Israel are imminent, but things can change quickly in times of war. The Israeli army, in pursuit of Hamas, turned Gaza to rubble. If it tries to do the same in Lebanon in pursuit of Hizbullah, many options that were once dormant become live.
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At the moment, Europe appears powerless, an ineffectual bystander, but that might not remain the case if the slaughter of innocent people continues. The EU might not have an army, but it has money – and money has over the years proved itself to be more powerful than armies, ideologies or religions. And maybe more than money it has an opinion, and European public opinion is repulsed by what it sees every day on its screen. For now a detached realpolitik governs the capitals of the Continent – but will that always be the case? Imagine, for example, the Israelis attack European UN peacekeepers who are protecting civilians in South Lebanon. What happens then?
At present, the EU is four-square behind Tel Aviv, much to the dismay of millions of European citizens of all hues. Germany has a historical problem which doesn’t need to be explained here and any moves against the Jewish state from Berlin would indicate that we are in uncharted territory. But positions change in crises. Although Ireland is an outlier in terms of its overwhelming support for the Palestinians, throughout the rest of Europe, opinion is divided, largely based on generational lines. For example, 46 per cent of Europeans express sympathy towards Palestinians, compared to 38 per cent towards Israel. There is, however, a clear generational divide, with younger people (especially Gen Z) more likely to support Palestinians’ rights. For example, in France, only 32 per cent of those under 35 view Israel favourably, while 57 per cent of those aged 65 and above do so.
Imagine the slaughter continues, support for Israel diminishes further, and it is explained to Europeans that because the EU trade with Israel is so lopsided Europeans wouldn’t feel a thing from imposing sanctions, while the Israeli economy would be devastated. What might happen then? At this moment, it seems many EU citizens still see Israel as a small country surrounded by implacable enemies – the original David versus Goliath story. But with every atrocity against innocent children, that narrative becomes more and more difficult to sustain, even for those with long memories.
Eventually all conflicts come to an end. Usually a bigger power enters and dictates the terms, determines the outcome and accelerates the process to peace. Pressure is brought to bear on all parties to come to the table, typically a bit of carrot and a bit of stick. If the reality of EU sanctions, which are already in force against Russia, were to be part of that pressure, might Israel think twice?
As we enter the second year of this war, consider what might happen if the conflict moves from the chatroom to the boardroom: who will feel the pressure? Today it seems unlikely, but the one thing we know about crises is that things move quickly and what was extreme becomes mainstream and what was mainstream becomes redundant. We are on that path.