The European Union's decision to classify parts of the Modi'in-Reut-Maccabim as settlements and to deprive it of tax benefits has caused an uproar among officials in Jerusalem. Foreign Ministry officials claim that surprise move came after the EU unilaterally pulled out of negotiations that have been conducted on the matter, with Israeli officials fearing that the move will encourage a European ban on products made in the city, and perhaps even place Modi'in at the center of diplomatic controversy.

In 2005, Israel and the EU signed an agreement meant to create a free trade environment between Israel and EU member nations. The agreement stipulated that customs authorities would check the zip code of origin of Israeli goods, and that products originating from outside the Green Line would not be subject to import tax exemptions, while products originating within the Green Line would receive such exemptions.

A few months ago, senior EU officials notified the Foreign Ministry in Jerusalem that plans were in place to update the list of settlements and points of origin that are not eligible for tax exemptions. A Foreign Ministry source stressed that the update is the result of political pressure exerted by some EU member nations, and persons of influence in the European parliament, which claim that supervision of goods from settlement is not tight enough, and that some products are wrongfully receiving exemptions.

Within the framework of the update, the EU made two small, but rather significant changes to the list. Before the changes, only zip codes were listed, but now the names of settlements will be listed as well.

Also, in the past, the list was internal, and shared only with customs authorities in EU nations charged with supervising. Now, the list will be posted on the internet and open to the public. Some of the responsibility will now be on importers themselves, when they will ask for tax refunds.

Israel was against the changes from the outset of negotiations, and representatives of the Israeli Ministry of Industry, Trade and Labor immediately began negotiations with EU. Talks went on for months until roughly two weeks ago, at the end of July, EU diplomats informed the Israeli Embassy to EU institutions in Brussels that negotiations were to be immediately halted.

According to a senior Foreign Ministry official, EU diplomats stressed that the comments and alternative suggestions offered by Israel were no acceptable, and the entire list, including names of settlements, would be publicized a day later. “They unilaterally pulled out of the negotiations,” according to the official, who was involved in the talks. “The negotiations were just hijacked by the EU parliament, and political pressure that came from some EU capitals.”

Israel protested the end of the negotiations, and sent a letter of complaint to senior EU officials, however the new, updated version of the list was printed nonetheless.

Examination of the new list reveals that contrary to the 2005 version, the new list contains three zip codes that were previously not included, all within the city of Modi’in-Maccabim-Reut. The zip codes cover a series of streets in Maccabim, located within a “no-man’s land.” The territory, which varies in width from 1 to 3 kilometers, was left as such following the conclusion of the War of Independence in 1948; an area between the Israel-Jordan border.

Because the area is technically in question, the EU decided to include it in the list of areas ineligible for tax exemptions. The fact that Modi’in, Maccabim, and Reut unified a few years ago, become one municipality, the name of the entire town appears on the EU’s list, alongside the three zip codes.

Aside from the copious anger the unilateral end of negotiations caused in Israel, officials in Jerusalem fear that following the addition of the town’s name to the list, investors and importers in Europe will conclude that all of Modi’in-Maccabim-Reut is a settlement, and won’t delve deeper into the issue.

 “People in Europe will see the list, and tell themselves there’s no reason to get involved – so they won’t invest, and they won’t buy goods from there,” said a senior Foreign Ministry official. “At this point some might even call for a general boycott of all goods from Modi’in, and then from all Israeli goods – it’s a slippery slope.”

An EU diplomat that was involved in the developments told Haaretz on Monday that the move was meant to increase the awareness regarding products from the settlements. According to the official, the move benefits Israel, in that it helps to specify which territories are inside or outside of the Green Line, which would prevent a general boycott of Israel within the EU.

The EU decision is not just raising fears of boycotts of economic damage, however. The Foreign Ministry stated that the EU decision could also include Modi’in in the Israeli-Palestinian conflict, even though a most of the city is located in Israeli territory.

“Tomorrow Abu Mazen will demand that we leave Modi’in because the EU stated that it’s in a no man’s land, an area in question,” said a senior Foreign Ministry official. “But whoever is in touch with reality has no doubt that the towns of Modi’in, Maccabim, and Reut are an integral part of Israel, and there is no doubt regarding their future.”