Judging by the comments flying around the Israeli media, government officials are seriously displeased by the EU's decision to get tough about settlements – which are, of course, illegal under international law. Israeli officials have described the new requirement, according to which Israel must promise that EU funding won't flow into settlements, as an "earthquake", a "brutality", "a miserable directive" and "undermining the peace process". Israel's media have referred to the situation as a "crisis".

All the EU has done is put into practice what it has been saying for decades: that the settlements are bad news and agreements between Israel and the EU over funding for education, research and other projects must state specifically that they do not apply to settlements in the Palestinian West Bank and East Jerusalem. But, from the startled Israeli response, it's as though it had assumed that the EU was just bluffing all those years.

And for a long time, it really has looked that way: the EU has, throughout the Oslo years, been diligently bankrolling the Palestinian Authority, saving the Israeli taxpayer the trouble of having to do so – effectively keeping Israel's occupation afloat. Europe has also watched Israel continuously flout international law while expanding settlements and their infrastructure – there are now some 520,000 settlers in the West Bank and East Jerusalem. Sure, there have been predictably disapproving words from European officials, but action, penalties, consequences? Not so much. This has been a constant source of frustration to Palestinians, not just because the settlements flout international law and stated international positions on the peace process, but because Palestinians want political solutions, not aid. (There is no reason, other than the Israeli occupation, for professional people- and resource-rich Palestine to be dependent on aid – but it is.)

Now it looks as if the EU has finally lost patience with Israel. As Akiva Eldar, veteran Israeli journalist and writer for Al-Monitor, says: "The Israeli government didn't take the Europeans too seriously and crossed over from just ignoring them to humiliating them. The EU looked at the current cabinet and thought, 'Hey, that isn't rain: they are spitting on us.'"

Just a cursory look at the past few years would show the sources of such growing frustration. Israel's latest assault on Gaza, in November 2012, continued the Israeli practice of razing to the ground projects, buildings and infrastructure that Europe has funded. In a similar vein, Israel has just issued an order to stop work while it considers demolishing an EU-financed sustainability project – hothouses and solar panels – in the South Hebron hills.

There's presumably only so long that European officials can watch such Palestinian projects get desiccated and still think that aid, not political pressure, is a good idea – especially in the middle of a Eurozone crisis and while there are other nations more in need of aid. Meanwhile, the building of settlements is at a seven-year high, while the number of eviction notices for Palestinians living in Area C – the 60% of the West Bank under full Israeli control – is also rising. And earlier this year, Israel announced plans to build on the E1 part of Palestine – as punishment for the Palestinians upgrading their membership status at the UN. Such construction would put an end to the contiguous Palestinian state to which the EU claims to be committed.

Some will say that none of this matters. Many Israelis relegate the EU to the back seat – while the apparently more reliable US steers the go-nowhere, zombie peace talks with the Palestinians. One Israeli suggested to me that this latest EU stance was simply an attempt to deflect attention from real, critical problems in the Middle East – notably in Syria. Another analyst pointed out that the EU doesn't worry about the small print relating to the occupied territories when the treaties being signed are beneficial to EU countries. Certainly it is deemed an irritant that, while both the US and the EU make their position on settlements clear, only the EU is politically loaded enough to dare to try to bind its agreements to those principles.

That's the trouble, of course: Israel sees international policy on settlements as simply a guideline or position statement, as opposed to actual law. This escalating sense of hubris over settlement expansion – and getting away with it – is what makes the EU move such a shock for Israel: Gush Shalom, Israel's peace bloc, likened the EU decision to "a bucket of cold water poured on the head of a drunk".

The Israeli government may prefer to forget about the Green Line, but this EU directive is a clear reminder that the international community will not. And though it doesn't affect Israel's trade agreements with Europe, it has a financial impact: people attending an emergency Israeli government meeting spoke of adverse effects on the economy, academia, culture and sports.

Most significantly, the move sends a clear message to Israel that refusing to comply with international law does have tangible consequences.

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