Complete EU Boycott Would Cost Israel Billions of Dollars, Finance Ministry Warns

A complete boycott of Israel by the European Union would cause the country to lose some 88 billion shekels ($23.3 billion) of exports, cut 40.4 billion shekels from gross domestic product and cost some 36,500 jobs, the Finance Ministry said in a report obtained by TheMarker.

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A complete boycott of Israel was the most severe of four possible scenarios contained in the report, commissioned two years ago by then-Finance Minister Yair Lapid. But even a more limited boycott could have profound effects on the economy, it warned.

The report, which only took into account the direct damage of the boycott, was commissioned out of concern that Israel’s relations with Europe and the Western world are at risk of a turning point for the worse. Israel was seen as an ally in the so-called War on Terror after 9/11, but more recently “there’s been damage to Israel’s standing, mainly in liberal circles. Today, the issue of a boycott is being advanced by non-governmental organizations and promoted by people who enjoy high public profiles.”

The report compared Israel to South Africa, which suffered a global boycott in the 1980s against the country’s apartheid regime. It didn’t predict how or when that might happen, if at all – but it suggested that a breakdown of Israeli-Palestinian peace talks could be the reason, especially if the onus for the failure was placed on Israel.

In the least severe of the four scenarios it envisions, the treasury report said the EU would lead a voluntary boycott of West Bank settlements – in fact, a policy that has more or less been adopted since the report was commissioned. In that scenario the loss to Israeli exports would reach 1.07 billion shekels a year, and the loss to GDP 480 million shekels, with 435 job losses in the settlements.

The EU has already effectively barred exports of animal products from the West Bank and Golan Heights, and does not extend Israel’s free-trade agreement to the settlements. It is threatening to force settlement companies to label their products as made in the West Bank, which would make it easier for consumers to boycott them.

Israeli exports of goods and services to Europe reached 83 billion shekels in 2012, the year the report was commissioned, making it Israel’s single biggest market. But only 2.1 billion shekels, or 2.5% of exports, originate from the West Bank.

The report said a more severe scenario might come in the form of formal sanctions against settlement exports, which would almost certainly hurt exports from businesses inside pre-1967 borders.

A fourth scenario envisions the EU rescinding its 1995 association agreement with Israel, which is the basis for the free-trade agreement.

More broadly, the report warned that deteriorating trade relations with the EU could lead to slower economic growth and a lower standard of living for Israelis as the country’s open, trade-oriented economy become more closed. Foreign investment would likely decline together with exports, pushing Israel into a current account deficit.

In response, the government could try to revert to a policy of a fixed exchange rate for the shekel, using Bank of Israel foreign reserves to defend the currency. The report warned that a boycott would lead to increased public and private debt, while at the same time making it harder for Israel to raise funds abroad.