EU upset over West Bank exports

Ariel Sharon: a strong supporter of settlements

The EU and Israel have failed to reach a deal on exports from settlements.

The EU accused Israel of foot-dragging in talks over goods from West Bank settlements in Palestinian territory.

Israel and the EU have a free trade agreement, but the EU says it should not cover trade from the West Bank.

Although only about $7m out of Israeli-Europe exports of $22bn are affected, EU Commissioner Chris Patten said that patience was running out and the issue was an "aggravation and irritant".

He added that "patience has been given a whole new meaning by the way we have tried to deal with this issue".

Israeli diplomats say that "discussions are continuing" and asked the EU to refrain from further action.

Technical talks

One year ago, technical talks between the two sides were supposed to begin over the rules of origin to ensure that Israel did not seek to put a "Made in Israel" label on goods produced in the occupied territories by Israeli settlements.

The EU says that goods produced in the West Bank and Gaza strip are not covered by a trade agreement signed in 2000 between the EU and Israel, which offers low or zero tariff access.

It has recommended that member states' customs officials should demand a bond from Israeli exporters until they can verify their exact origin.

The issue is highly political, because it deals directly with the legality of Israel's occupation and borders.

The dispute is also threatening to undermine talks on a broader association agreement between Israel and the EU that could lead to a free-trade treaty.

Israeli resistance to making any concessions on this matter has toughened since Ariel Sharon was re-elected Prime Minister in January, and Shimon Peres was dropped as foreign minister.

European concerns

The EU has long held that Israel should end its expansion of settlements on the West Bank, which it says are illegal.

And it says that the Israeli occupied territories are not part of its internationally recognised territory of the state of Israel.

It has strongly backed the "road map" plans for a peace deal which would lead to the creation of a Palestinian state.

The EU has a trade agreement with the Palestinian Authority, which allows exports from the West Bank and Gaza to enter Europe at similar low tariffs.

Failing economy

Israel is also facing serious economic difficulties at home.

Figures published on Tuesday suggest that the Israeli economy would decline for the third year in a row.

The Central Bureau of Statistics said that it expected the economy to grow by just 1% in 2003, after declining by 1% in 2001 and 2002.

But the growth will not be enough to keep up with a population increase of 2%, leading to a declining living standard.

The Israeli finance ministry is hoping for growth of 2.5% in 2004.

A series of strikes and disputes over the growing budget deficit have added to the country's economic woes.