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As the Middle East faces intensified conflict in 2024, particularly in Gaza and the West Bank, the European Union (EU) is reassessing its economic relations with both Israel and Palestine. The ongoing violence not only fuels a humanitarian disaster but also exerts a profound economic toll on the region. For the EU, this moment demands a recalibration of its trade policies and cooperative frameworks, as its economic ties with the region become increasingly intertwined with the political complexities of the conflict.

The economic repercussions of the crisis are stark. In Palestine, the already fragile economy has been severely disrupted, with GDP projected to shrink by up to 5% in 2024, following a contraction of 6.2% the previous year. The Gaza Strip, in particular, is facing dire conditions, with unemployment climbing to an unprecedented 74%, and food insecurity afflicting nearly 60% of the population. The Palestinian Authority is teetering on the edge of fiscal collapse, grappling with a financing gap projected to exceed $1.2 billion. This economic unraveling has been compounded by dwindling revenues and rising poverty, which could engulf nearly 79% of the population by early 2024.

Israel’s economy, though more robust, has also suffered due to the renewed conflict. In the wake of the Hamas-led attacks in late 2023, Israel experienced a 4.1% contraction in its economy, with growth forecasts for 2024 slashed to just 1.5%. This slowdown reflects significant drops in consumer spending and business investment. Moreover, the imposition of restrictions on Palestinian workers has exacerbated labor shortages in key sectors, adding further strain to Israel’s economy.

In the face of these economic challenges, the EU finds itself at a crossroads in its trade and economic relations with both Israel and Palestine. The EU has long been Israel’s largest trading partner, accounting for 28.8% of Israel’s total trade in goods as of 2022. This economic relationship is underpinned by the EU-Israel Association Agreement, which fosters political dialogue and economic cooperation. However, the escalating conflict, particularly the humanitarian crisis in Gaza, has raised concerns within the EU about the ethical implications of continuing robust trade relations with Israel. Growing calls for accountability regarding Israel’s human rights record have sparked debate over whether the EU should reconsider or condition its economic engagement.

Some EU policymakers and human rights advocates are urging a suspension of trade ties with Israel as a way to apply pressure for compliance with international law. This potential shift could signal a move toward conditionality in trade relations, where continued economic cooperation would be linked to Israel’s adherence to humanitarian principles and international norms. Such a shift would mark a significant departure from the EU’s traditional stance of separating economic engagement from the region’s political conflicts.

Meanwhile, the EU’s economic cooperation with Palestine has historically centered on financial aid aimed at supporting stability and development. Given the deepening economic crisis in Palestine, the EU faces the urgent need to bolster its support mechanisms. With poverty levels on the rise and the Palestinian economy on the brink of collapse, the EU’s financial assistance will be critical for mitigating the worst effects of the crisis. This could include increasing direct aid, as well as funding infrastructure projects that would help rebuild Palestine’s economy in the long term.

To navigate these intertwined economic and political dynamics, the EU must adopt a strategic approach that balances immediate humanitarian needs with longer-term goals for stability and peace in the region. One key aspect of this strategy could involve revisiting its trade agreements with both Israel and Palestine to ensure they align with current humanitarian realities. For example, introducing conditions tied to human rights and peace-building efforts could incentivize both sides to pursue meaningful dialogue and conflict resolution.

Another critical element is the use of conditional aid. By tying financial assistance to specific goals, such as human rights improvements or conflict de-escalation, the EU could encourage constructive engagement from both Israel and Palestine. This approach would help ensure that EU resources are used not only to alleviate suffering but also to promote long-term solutions to the underlying causes of the conflict.

Additionally, the EU should enhance its diplomatic efforts to mediate peace talks between Israel and Palestine. Economic cooperation can be a powerful tool for building trust and fostering dialogue. By promoting joint initiatives that benefit both sides, the EU could help pave the way for broader peace-building efforts. Moreover, by prioritizing humanitarian aid for those most affected by the conflict, the EU can mitigate immediate suffering while laying the foundation for future economic recovery.

As the crisis in the Middle East escalates in 2024, the EU’s economic positioning must evolve to address both the humanitarian needs and the complex economic dynamics at play. By reassessing its trade relationships with Israel and Palestine, enhancing financial support for economic recovery, and fostering diplomatic efforts for peace, the EU can play a pivotal role in promoting stability and prosperity in the region. Failure to act decisively could exacerbate cycles of violence and instability, with far-reaching consequences not only for the Middle East but also for Europe’s geopolitical interests.

Written by: Nenad Stekić