European recognition of Palestine state sparks concerns of economic fallout with Israel

Diplomatic row with Spain, Ireland and Norway would feed anti-Israeli sentiments in Europe, analyst says

Irish Foreign Minister Michael Martin, Spanish Foreign Minister Jose Manuel Albares and Norway's Foreign Minister Espen Barth speak during a press conference on the recognition of Palestinian statehooShow more

Israel is unlikely to break off economic ties with Norway, Spain and Ireland over their recognition of a Palestinian state on Tuesday, although more restrictive business activity and a snowball effect among countries in the EU is seen as a growing possibility, experts say.

On Tuesday, the three countries formally recognised the state of Palestine in a move intended to end the Israel-Gaza war and help find a two-state solution to the conflict.

Spain and Ireland are EU members and while Norway is not, it is associated with the bloc through its membership of the European Economic Area.

In response to the decision by Madrid, Dublin and Oslo, Israel recalled its ambassadors and accused the countries of siding with Hamas and its backer Iran.

“The overall position of Ireland-Spain-Norway to Israel is minimal economically, the links are very small, but would be of impact as others could be following suit too,” Cyril Widdershoven, analyst at Hilltower Resource Advisors, told The National.

“As always in EU, if one sheep is crossing the street, the others will follow.”

Slovenia and Malta have signalled they will soon sign a joint declaration with Spain, Ireland and Norway.

Last week, Slovenian Prime Minister Robert Golob said that “the more countries that join us, the greater will be our leverage over both sides to achieve a truce and the release of hostages”.

More than 140 countries recognise Palestine, but most western powers – such as the US, UK and Germany – do not.

On Tuesday, EU foreign ministers agreed to call a bilateral council meeting with Israel to discuss the country's compliance with its human rights obligations under the EU-Israel Association Agreement.

This agreement aims to provide a legal and institutional framework for political dialogue and economic co-operation between the EU and Israel.

The compliance request followed a strike on an Israeli-designated “safe area” in the city of Rafah in southern Gaza on Sunday night, in which at least 45 people were killed. Since then, scores of civilians have been killed in subsequent strikes.

While the International Court of Justice, the UN's highest court, has issued a ruling ordering Israel to halt its military offensive against Rafah, Israeli tanks were reported in central Rafah on Tuesday.

Israel's bilateral ties with Norway, Spain and Ireland will be significantly strained, but economic relations are expected to remain unaffected for now, Mr Widdershoven said.

“Israel will not break off relations at all, as they need the Europeans still. A diplomatic row with some European countries right now will give food to anti-Israeli sentiments inside of the EU,” he added.

But Mr Widdershoven said Israel believes elections for the European Parliament on June 6 could change the political landscape in its favour.

Nearly 400 million EU citizens will vote to elect members of the European Parliament amid growing support for far-right parties in some countries.

“Government shifts, particularly towards the right, could alter political stances and potentially impact future relations,” said Ilan Alon, dean of the school of economics at the College of Management Academic Studies, Israel.

“Changes in the EU – such as in the Netherlands – further influence these dynamics, suggesting that the long-term impact will depend on future political developments and the resilience of established trade relations,” Mr Alon told The National.

The Netherlands swung to the right last year after the far-right Freedom Party won the largest number of seats in national elections in November.

Nationalist and far-right parties have also moved into positions of power in Italy and Sweden.

EU-Israel trade

The EU was Israel’s biggest trade partner in 2022 accounting for roughly 30 per cent of its trade in goods.

Total goods trade between the EU and Israel fell to $45.15 billion last year from $50.69 billion in 2022, according to EU data.

Negotiations to expand agricultural trade between the EU and Israel concluded in 2008, with the agreement taking effect in January 2010.

In 2012, the EU and Israel finalised an agreement on Conformity Assessment and Acceptance of Industrial Products for pharmaceuticals. The agreement aims to enhance bilateral trade, eliminate trade barriers, and allow for mutual recognition of pharmaceutical certifications.

Trade and economic relations between the EU and Israel were further strengthened by the euro-Mediterranean Aviation Agreement, which came into full effect in 2018 and expanded air travel between the two regions.

Israel's economy experienced a nearly 20 per cent slump in the fourth quarter of 2023 following the outbreak of war, marking one of its worst downturns.

The war with Hamas paralysed businesses, led to evacuations, and resulted in the mobilisation of hundreds of thousands of military reservists.

“The recognition of Palestine [by the three countries] is largely symbolic and is not expected to have an immediate economic impact on their trade relations with Israel,” Mr Alon said.

“These countries depend on Israel for key products, especially in technology and pharmaceuticals.”

Ireland

The decision to recognise Palestine has severely strained the diplomatic relationship between Dublin and Tel Aviv.

This week, Israel's ambassador to Dublin cautioned that the crisis in bilateral relations was sending a negative signal about Ireland as a tech hub and raising concerns among Israeli investors in the Irish IT services sector.

“We are getting more and more phone calls and conversations of concerned people – if it's Israelis who invest in Ireland and are concerned about their investment, if it's Israelis who have relocated to Ireland into different tech companies,” Dana Erlich told Reuters.

Israeli start-ups and tech firms have established a presence in Ireland, setting up offices and collaborating with local companies.

In 2022, Ireland exported products worth $1.83 billion to Israel, and the main exports were broadcasting equipment, and computers, according to the Observatory of Economic Complexity data visualisation platform.

In the same year, Israeli exports to Ireland totalled $3.86 billion, and Israel's main exports were microchips, and aerospace products.

Last month, Ireland announced that its €15 billion ($16.25 billion) sovereign investment fund would sell off its holdings in six Israeli companies, including major banks, due to their operations in the occupied Palestinian territories.

Norway

Norway’s $1.6 trillion sovereign wealth fund, the world’s largest, has come under pressure from policymakers and non-governmental organisations over its investments in Israel.

At the end of 2023, the fund had investments totalling $1.41 billion in Israel, spread across 76 companies. These investments include companies operating in real estate, banking, energy, and telecoms sectors.

In terms of trade, Norway’s exports to Israel stood at $429 million in 2022 – with ships and fish the key exports – while Israeli exports to Norway in the same year totalled $127 million, the OEC said.

Spain

In February, Spain suspended all arms export licences to Israel amid growing international criticism.

Spain exported arms and ammunition, as well as parts and accessories related to them, to Israel, worth $1.74 million in 2023, according to UN Comtrade.